Building Credit

Paying off loans may be a daunting task after graduation, but the benefit of building good credit is essential to making larger purchases down the road. Good credit can help you finance a car or home, and it may even help you land a job.

Your Credit Report
Like any other loan, student loans are listed on your personal credit report. Your credit report contains specific information about each of your accounts, including:

• Account creation date
• Credit limit
• Total balance
• Monthly payment
• Payment patterns

When banks and other potential lenders view your credit report, they can see this information. The information in your report contributes to your credit rating, which affects your ability to get financing. Paying down student debt on time proves that you can be trusted with larger loans in the future.

Avoiding Default
If you are 270 days late in making your monthly payments, your loan goes into default. The consequences of defaulting on your loan are severe:

• Your entire balance can become due immediately
• Your account can be turned over to a collection agency
• Your tax refund can be withheld
• The government can garnish your wages
• You can lose your deferment options and not be able to secure additional financial aid
• You may not be able to enroll in a college or university until the default is taken care of

Defaulting on your loan may affect your credit rating for years, and may prevent you from getting a loan, a credit card, an apartment, and even a job.

Rehabilitating Your Credit
If your loan goes into default, contact your lender immediately. It's possible to mend your credit after a default; your lender can help you set up a schedule for reasonable monthly payments. After you've made nine to twelve on-time payments, it's possible to have the default status removed from your loan.

If you're worried that you may default in the future, contact your lender before the default to see if deferment or forbearance options are available. Protecting your credit is important, even if your financial future is unclear.

Tax Deductible Payments
In most cases, up to $2,500 of the interest on your student loans may be deductible on your Federal tax return. You can't get the deduction if you're married and filing separately, or if you can be claimed as an exemption on anyone else's tax return. Read the eligibility information on Form 1040A or 1040 to see if you qualify for this deduction. For other tax credit information, visit the IRS site and look for Tax Benefits for Education.

By staying on top of your student loan payments, you can protect and even improve your financial future.