Should I get a student loan?

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dreamymind
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Should I get a student loan?

Postby dreamymind » Thu Sep 22, 2016 6:51 pm

I am being offered a subsidized and an subsidized federal loan at my college. I don't need it because I got enough scholarships, but I was wondering if it would make sense to get it just to build credit. I don't want to pay any interest (and I think I could avoid it if I take out a subsidized loan and pay it off within a certain timeframe)

1) Should I take out a loan?
2) Can I take it out and immediately pay it off and how would it affect my score? Or for how long should I keep it open to maximize the score?
3) Does it matter if the loan amount is small or large for the purposes of credit building?

I have 3 credit cards but I know that loans are a different type of credit so it should help the score in theory..

Thanks!!


JustRewards
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Re: Should I get a student loan?

Postby JustRewards » Thu Sep 22, 2016 8:40 pm

I think the conventional advice would be to avoid ever taking out a federally guaranteed student loan unless absolutely necessary. That's because they are one of the few types of debt that you can't ever get away from, even in bankruptcy. But, that would be a moot point if you're able to quickly pay it off. That said, there are easier and less risky ways to build your credit. Simply getting credit cards and paying your bills on time can put you on a pretty steady trajectory toward a good credit score.

Tubpbs
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Re: Should I get a student loan?

Postby Tubpbs » Thu Sep 22, 2016 8:45 pm

JustRewards wrote:I think the conventional advice would be to avoid ever taking out a federally guaranteed student loan unless absolutely necessary. That's because they are one of the few types of debt that you can't ever get away from, even in bankruptcy. But, that would be a moot point if you're able to quickly pay it off. That said, there are easier and less risky ways to build your credit. Simply getting credit cards and paying your bills on time can put you on a pretty steady trajectory toward a good credit score.


Agreed. There seems to be no real value for you in getting the student loan especially when compared to getting a credit card. There is a theoretical slight advantage to getting the loan because it will make your credit mix stronger but it sounds like the account will be a short term credit building plan. You could get a credit card you plan to keep long term (and earn rewards on hopefully) instead...
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dreamymind
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Re: Should I get a student loan?

Postby dreamymind » Thu Sep 22, 2016 9:36 pm

JustRewards wrote:That's because they are one of the few types of debt that you can't ever get away from, even in bankruptcy.


I have enough money saved up to pay it off right away or at any other point later

There is a theoretical slight advantage to getting the loan because it will make your credit mix stronger but it sounds like the account will be a short term credit building plan


Will overall my credit score increase or decrease as the result of taking out that loan? And what do you mean by a short term credit building plan?

I can pay it off right away or later, depending on what would maximize my credit score. What would maximize it?

So far I don't understand why I shouldn't take out that loan other than that it can't be discharged in a bankruptcy (which is not going to happen)

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Re: Should I get a student loan?

Postby Tubpbs » Fri Sep 23, 2016 5:15 am

dreamymind wrote:
JustRewards wrote:That's because they are one of the few types of debt that you can't ever get away from, even in bankruptcy.


I have enough money saved up to pay it off right away or at any other point later

There is a theoretical slight advantage to getting the loan because it will make your credit mix stronger but it sounds like the account will be a short term credit building plan


Will overall my credit score increase or decrease as the result of taking out that loan? And what do you mean by a short term credit building plan?

I can pay it off right away or later, depending on what would maximize my credit score. What would maximize it?

So far I don't understand why I shouldn't take out that loan other than that it can't be discharged in a bankruptcy (which is not going to happen)


It is not possible for us to know how this will affect your scores without having a 100% complete picture of your credit profile and even then, we'd still be guessing.

What is known is that in the short run, the action of opening the account (not sure actually if opening a student loan requires a credit inquiry or not - I've never opened one - but I assume yes) will most likely cause an immediate short term drop in your scores (new inquiry and new account reporting will lower your average age of accounts and increase the number of inquiries you have - both small factors, but with a limited profile, will likely have some affect on your scores). There will likely be some slight overall increase in your scores after a year or so once the account ages, but if you're going to close it soon thereafter there really is no point. You're likely to achieve mostly the same results with a new credit card account - that you will hopefully keep long term.

As a general rule of thumb, only apply for credit that you need. You clearly don't need a student loan. You may not need another credit card either, but you're more likely to make use of and to need a credit card account long term than a student loan you don't need now and definitely won't in the future. Look up the components of your credit score. The only marginal advantage the loan will offer over a credit card is "credit mix" and it just won't make a big difference is the long and short of it...

Hope this was helpful.
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Vattené
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Re: Should I get a student loan?

Postby Vattené » Fri Sep 23, 2016 5:22 pm

I agree that it probably is not worth it. I'd also guess (and as mentioned, it's just a guess) that if you did this it would help your score because you'd have a different type of credit added to your profile. The ratio of your outstanding balance to original loan amount will be high, however, which is a factor that would hurt your score. I haven't seen what it's done to my score firsthand yet, but my understanding is having an installment loan in your credit mix helps you but once you pay it off there is no "memory" of that and your score will just drop again. So you could keep the loan open as long as you need to for scoring purposes (while paying high interest on it), but once you do pay it off you probably won't be much better off.

I think the gains are too unknown and too marginal to make this beneficial. You can build a solid credit profile on credit cards alone - enough to get you a loan when you actually need it on good terms.
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swipe_masta
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Re: Should I get a student loan?

Postby swipe_masta » Sun Jan 15, 2017 2:28 pm

dreamymind wrote:I am being offered a subsidized and an subsidized federal loan at my college. I don't need it because I got enough scholarships, but I was wondering if it would make sense to get it just to build credit. I don't want to pay any interest (and I think I could avoid it if I take out a subsidized loan and pay it off within a certain timeframe)


Did you mean a sub and an unsub? You can't get two sub loans unless one is a parental loan that your parents need to sign for you to get. A subsidized loan is when the government pays for the interest of your loan until up to six months after you graduate. Unsub is when the interest accrues as soon as you get the loan.

Even if you don't need it and you are able to pay for it right away, payment of student loans depends on the company you borrow from. Some penalize you for paying too early (before you graduate), some don't even give you an option to pay until you are out of school. Paying off the loan too quickly can't hurt you, but won't benefit you that much either...

If it really is a subsidized loan where you don't accrue interest, take it out, put it into a CD or savings account with high yields and make some interest money before you pay the loan off after you graduate. This is what I personally did when I was in school. I got enough scholarships and financial aide to cover my tuition, worked PT jobs to pay rent/bills and saved the sub loan money in a CD. After I graduated, I paid the loan off with the original loan money before they started charging interest and made a few hundred dollars from the interest of the CD.

webbrowan
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Re: Should I get a student loan?

Postby webbrowan » Mon May 15, 2017 12:15 am

Well, it really depends on your financial needs. Since you mentioned that you already have sufficient scholarships and do not need the additional student loan, then ask yourself whether it is truly necessary to build additional credits? Bear in mind that you will still need to make monthly repayments during the entire loan period. If you can afford to do so, then why not?



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