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The First Thing to Do Before Paying Student Loans

Gerri Detweiler

Remember that first week of college or university, when you wondered how you’d ever make it through? If you’re like most students, simply trying to map out your course schedule probably felt overwhelming. There there were forms to fill out, books to buy, and lots (and we mean lots) of coursework.

Hopefully, you had a good adviser to help give you through the process.

Similarly, if you are out of school, trying to navigate your options for paying back your student loans may seem just as daunting. You probably have several loans with different repayment terms. Some may be federal loans and others may be private loans. How do you prioritize them, along with all the other financial demands — housing, food, transportation, etc. — you are facing?

When it comes to your student loan debt, think of your credit reports and scores as your adviser. They are there to provide some necessary context for your emerging financial life. As you begin to pay back your student loans, refinance them, defer them or opt for forbearance, you’ll need to understand the impact of your choices over time.

So the first thing you should do, then, even before starting to pay off your student loans, is begin to monitor your credit reports and credit scores. There are a few ways you can do this. First, each year you can get a free copy of each of your three credit reports from AnnualCreditReport.com . In addition, Credit.com provides users with a free credit tool that breaks down the information in your credit report using letter grades, and provides you with free credit scores too.

The information you find here can help guide you in three ways:

See the big picture. In school, you couldn’t just pick any class that sounded interesting. Unless you wanted to stay in school forever, you also had to make sure you fulfilled your requirements for your major and for graduation.

When it comes to your student loans, you can’t just look at each loan individually; you also must get a handle on your total student loan debt, which is likely made up of multiple loans. Your credit report will likely list all of these loans, so you can see how much you owe in total. You can also check the National Student Loan Data System to make sure you haven’t missed any of your federal loans.

But that’s just the start. You likely have other debts, and those are important to include in your debt repayment plan as well.

You should find most, if not all, of your debts — including your car payment, credit card balances, and your mortgage if you have one — listed on your credit reports. This will give you a much more complete picture of your overall debt situation.

If you discover your debt is more than you can manage, you may want to talk with a credit counseling agency or find out if you are eligible for the Income Based Repayment program.

Prioritize your payments.  You may want nothing more than to pay off your student loans fast . But in some cases it makes sense to pay off other debts more aggressively first. This is where your credit score comes in handy. Along with your score, you should get information about which factors are most influencing your score.

For example, let’s say you get your free Credit Report Card from Credit.com and you see that you’re not getting a good grade for the category that includes the debt you are carrying. (Your debt makes up nearly one third of your credit score.)

Now let’s say you have a credit card with a small limit; say $500, and your balance is $400. It’s likely that relatively small balance is having a much greater impact on your score than your much larger student loan balances.

Why? Because you are close to the limit on that card and the high balance is affecting your “utilization.” (Student loans are installment loans, not revolving accounts, and that factor is not a concern there.) Pay it down as fast as you can and you may see your score go up. But if you put that same amount of money toward your student loan, your score may not budge.

You didn’t learn that in school, did you?

Monitor your credit. If you pay them on time, your student loans should help your credit scores, even if the amounts are relatively large. But if you miss a payment on one of these loans — or any other — your credit scores will suffer. Even one late payment can drop your credit scores by 50 points or more. And if you’re taking on more debt, you’ll probably see that reflected in a lower score.

By reviewing your free credit score each month, you’ll see whether your credit is improving. If it is, keep doing what you’re doing, and if it’s not, you know you’ve got your homework cut out for you!

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