Personal Student Loans and Your Credit Score

Personal student loans are typically used to cover the balance of education costs not met by senior debts, such as federal or private tuition loans. Personal loans are typically extended in cash to an individual who requires flexibility with the principal; personal student loans do just this but are specifically geared toward students. Taking on this additional debt does not look good on your credit score, so you should walk carefully toward this option.

Personal Student Loans are Additional Debts

Typically, a person taking out this type of loan already has a loan for tuition and direct education cost. A personal student loan is geared more toward the excess costs or living expenses associated with living as a student. Since you already have debt obligations, you will be taking on additional debt, further compromising your financial position in order to afford the cost of school. Taking on too much debt will always reduce your credit score. A credit score is partially a measure of how much debt you have to how much equity, or assets, you own. Students typically have very low asset bases. So, taking on huge debt obligations throws their debt to asset ratio out of balance, leading to a compromised credit score.

Personal Student Loans are High Risk

Personal loans will typically take a back seat to your tuition loans. Tuition loans are senior debts, meaning they will be the first to be paid off if you declare bankruptcy. They also may be secured against an asset or guaranteed by the government to assure the lender against loss in a default. This is not the case with personal student loans, which are typically unsecured and high risk. The lender will charge you more in interest rates to take on this type of loan. High risk loans will have a greater impact on your credit score, for better or for worse, then low risk loans. If you succeed in managing your high risk debt and paying it off in time, your score will go up. If you miss even one payment, though, your lender will exact financial penalties from you and assure your credit score drops abruptly.

Alternatives to Personal Student Loans

There are a number of ways to afford the cost of living while in school without assuming personal student loan debt. One of these methods is to opt for a work-study program. In this option, your college will permit you to work at an on-campus job while attending school. You may receive a certain number of credit hours for this while still getting paid for the work, reducing the cost of tuition in a given semester and giving you money to meet daily expenses. Having an outside job while you attend school will also help cover the cost of loan payments. If you cannot work while you are attending school, then consider taking a credit card instead of a personal loan. This will typically present you with a more manageable debt load and have a better affect on your credit.


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