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Helping Your Child Make the Transition from High School to College

Helping Your Child Make the Transition from High School to College

Though you won’t be able to ride along in your child’s suitcase, there are ways you can help him or her make the adjustment to college. You can start by talking with your child about certain subjects before he or she leaves for college and familiarizing yourself with the emotions that he or she will likely face in the first few weeks and months. Then, you can provide a comforting shoulder to lean on. In doing so, you’ll need to walk a fine line between offering support and encouragement, and actually telling your child what to do. After all, finding the skills to adapt and thrive is part of what college is all about.

Things to do before your child leaves for college

Here are some things that you and your child can do before the first day of college:

  • Your child’s college may have provided him or her with the name, address, and telephone number of his or her prospective roommate. If so, your child may want to contact this person simply to say hello and/or to coordinate the common items that they’ll want to bring.
  • Until your child sees the size of the dorm room and meets his or her roommate (and sees what he or she has brought), your child should avoid buying large or hard-to-store items like a big-screen television, floor speakers for the stereo, skis, three winter parkas, and so on. These items can always be picked up on a return visit home, or they can be shipped by you.
  • Talk with your child about money management. Does your child have an account set up with a bank that has an ATM on campus? Will you be providing a certain amount of spending money to your child each month? Have you set up a budget? Does your child have a credit card? If so, is it to be used only for emergencies (preferable) or for everyday expenses? Have you agreed on a reasonable monthly spending amount? It’s important to discuss these matters now, because once at college, your child may be tempted to overspend or may be too distracted to pay close attention.
  • Talk with your child about alcohol and drugs. Though you may have had this conversation already with your child during high school, the stakes are higher now because you won’t be around every day to see what’s going on. Make sure that your child knows the dangers of certain drugs and the potentially volatile mix of drugs and strangers.
  • Make sure that your child knows that he or she can call you at any time if something comes up.
  • The day before your child leaves for college, spend time together doing something fun!

Settling in–the first week

During the first week of college, your child will probably attend a lot of orientation meetings. The welcoming committee, as well as your child’s dorm leader, academic advisor, and upper-class mentor, will likely all have meetings to introduce your child to a particular aspect of the college and answer questions. During this time, your child will also be trying to find his or her way around the campus–the dorms, the classrooms, the dining halls, the recreation center, the office that handles course registration, the student center, the bookstore.

Not surprisingly, the first week can be overwhelming. It’s common for students of all backgrounds to feel a range of emotions from exhilaration and happiness to anxiety, confusion, nervousness, and exhaustion as they take everything in (and try to appear cool in the process). It can help your child to know that everyone else is probably feeling the same way.

Now the hard part–the first eight weeks

Once the adrenaline rush of the first week wears off, reality sets in, and it can hit hard. There are so many things for your child to get used to. Perhaps he or she’s not hitting it off with his or her roommate. Or perhaps everyone likes to hang out in your child’s room night after night until 2 A.M. Maybe your child misses your chicken pot pie and lasagna. Or maybe he or she feels lost academically because every professor assigns hundreds of pages of reading each week with no additional guidance. Whatever it is (and there’s bound to be something), your child will need to adapt.

The first eight weeks of college are often regarded as the hardest, a time when your child must adjust to many new people and situations in every facet of his or her life. Yet this time is also the most important, because the academic, social, and personal skills that your child develops during this period will help lay the groundwork for a successful college experience. During this time, your child will develop lasting habits, attitudes, and ideas. Here are some of the issues that your child may be struggling with during the first eight weeks:

  • Homesickness and loneliness
  • Difficulty managing unlimited freedom and time
  • Academic pressure
  • Social awkwardness
  • Feelings of self-doubt and inferiority, trouble finding sense of self
  • Peer pressure related to alcohol, drugs, and sex
  • Roommate conflict

Encourage your child to use campus resources for help when necessary–for example, resident advisors for dorm issues, counselors for anxiety and/or depression issues, tutors for academic help.

As a parent, you’ll want to be as supportive as you can during this period. And keep those care packages coming! Your child will probably make daily trips to the mailroom, and he or she will be glad every time a letter or package arrives from you.

The importance of good study habits

Sure, college is about late-night snowball fights and pizza parties. But it’s also about academics, and unless your child develops good study habits, making the grade will be tough. Unlike high school teachers, college professors tend to be more sweeping in their assignments and provide less individual attention. So, your child will need to take the initiative and stay on top of the work. Here are some study tips for your child:

  • Try not to cram everything in at the last minute. Don’t start papers the night before they’re due (the computer is certain to crash, or the printer will inexplicably break), and don’t start studying for an exam the night before the test.
  • When taking notes in class, write down only the concept of what the professor is saying and focus on key points. If you try to write down everything verbatim, you won’t be able to keep up.
  • Study when you’re most alert, if possible. Save the other parts of the day for exercising, relaxing, socializing, or doing laundry.
  • Try to study in a quiet place with minimal distractions. Reading in your dorm room with the television blaring and friends sitting on your bed won’t be as productive.
  • Determine whether you like to tackle difficult projects first or last, then act accordingly.
  • For classes where participation is a part of your grade, review your notes right before class so you’ll be able to contribute to the discussion.
  • Don’t cheat. If you’re caught, you could get expelled. And if you’re not, you’re only cheating yourself (now that you’re in college, this is your life we’re talking about).
  • If you get a poor grade on a paper or exam, don’t despair and don’t give up. Be persistent and dedicated in your studying efforts.
  • Seek out your professor during office hours if you need additional guidance–that’s what he or she is there for.
  • Often there is no right or wrong answer; professors simply want to see if you can present a well-reasoned, articulate, and coherent answer.
  • Check your work over for mistakes before you pass it in.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions

Income Tax Planning and 529 Plans

Income Tax Planning and 529 Plans

The income tax benefits offered by 529 plans make these plans attractive to parents (and others) interested in saving for college. Qualified withdrawals from a 529 plan are tax free at the federal level, and some states also offer tax breaks to their residents. It’s important to evaluate the federal and state tax consequences of plan withdrawals and contributions before you invest in a 529 plan.

Federal income tax treatment of qualified withdrawals

There are two types of 529 plans–college savings plans and prepaid tuition plans. The federal income tax treatment of these plans is identical. Your contributions to college savings plans and prepaid tuition plans are tax deferred. This means that you don’t pay income taxes on the plan’s earnings each year.

Then, if you take out money and use it to pay for qualified education expenses, the earnings portion of your withdrawal is free from federal income tax. This presents a significant opportunity to help you accumulate funds for college.

Qualified education expenses include tuition, fees, and books for college and graduate school. Room-and-board expenses are also considered qualified if the beneficiary is attending college or graduate school on at least a half-time basis.

State income tax treatment of qualified withdrawals

States differ in the 529 plan tax benefits they offer to their residents. For example, some states may offer no tax benefits, while others may exempt earnings on qualified withdrawals from state income tax and/or offer a deduction for contributions. However, keep in mind that states may limit their tax benefits to individuals who participate in the in-state 529 plan.

You should look to your own state’s laws to determine the income tax treatment of withdrawals (and deductions). In general, you won’t be required to pay income taxes to another state simply because you opened a 529 account in that state. But you’ll probably be taxed in your state of residency on the earnings distributed by your 529 plan (whatever state sponsored it) unless your state grants a specific exemption. Also, make sure you understand your state’s definition of “qualified education expenses,” since it may differ from the federal definition.

Income tax treatment of nonqualified withdrawals (federal and state)

If you make a nonqualified withdrawal (i.e., one not used for qualified education expenses), the earnings portion of the distribution will usually be taxable on your federal (and probably state) income tax return in the year of the distribution. The earnings are usually taxed at the rate of the person who receives the distribution (known as the distributee). In most cases, the account owner will be the distributee. Some plans specify who the distributee is, while others may allow you (as the account owner) to determine the recipient of a nonqualified withdrawal.

You’ll also pay a federal 10 percent penalty on the taxable amount of the nonqualified withdrawal (usually, that means on the earnings). There are a couple of exceptions, though. The penalty is usually not charged if you terminate the 529 account. This is because the beneficiary has died or become disabled. Or, if you withdraw funds not needed for college because the beneficiary has received a scholarship. A state penalty may also apply.

Deducting your contributions to a 529 plan

Unfortunately, you can’t claim a federal income tax deduction for your contributions to a 529 plan. Depending on where you live, though, you may qualify for a deduction on your state income tax return. A number of states now allow a state income tax deduction for contributions to a 529 plan, and several other states are considering such a measure. Again, keep in mind that most states let you claim an income tax deduction on your state tax return only if you contribute to your own state’s 529 plan.

Most of the states that provide a deduction for contributions impose a deduction cap, or limitation, on the amount of the deduction. For example, if you contribute $10,000 to your son’s 529 plan this year, your state might allow you to deduct only $4,000 on your state income tax return. Check the details of your 529 plan and the tax laws of your state to learn whether your state imposes a deduction cap.

Also, if you’re planning to claim a state income tax deduction for your contributions, you should learn whether your state applies income recapture rules to 529 plans. Income recapture means that deductions allowed in one year may be required to be reported as taxable income if you make a nonqualified withdrawal from the 529 plan in a later year. Again, check the laws of your state for details.

Coordination with the Coverdell education savings account and education tax credits

You can fund a Coverdell education savings account and a 529 account in the same year for the same beneficiary without triggering a penalty.

You can also claim an education tax credit in the same year you withdraw funds from a 529 plan to pay for qualified education expenses. But your 529 plan withdrawal will not be completely tax free on your federal income tax return if it’s used for the same higher education expenses for which you’re claiming a credit. (When calculating the amount of your qualified higher education expenses for purposes of your Section 529 withdrawal, you’ll have to reduce your qualified expenses figure by any expenses used to compute the education tax credit.)

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Education Tax Credits

Education Tax Credits

It’s tax time, and your kitchen table is littered with papers and forms. As if this isn’t bad enough, you recently paid your child’s college semester bill. You don’t know where you’ll find the money to pay the taxes that you expect to owe. Well, you might finally catch a break. Now that your child is in college, you might qualify for one of two education tax credits. The American Opportunity credit and the Lifetime Learning credit. And because a tax credit is a dollar-for-dollar reduction against taxes owed, it’s more favorable than a tax deduction, which simply reduces the total income on which your tax is based.

These education tax credits depend on the amount of qualified tuition and related expenses that you pay in a given year, as well as your modified adjusted gross income (MAGI). To qualify for the maximum American Opportunity credit, your MAGI must be below $80,000 if you’re a single filer and $160,000 if you’re a joint filer. A partial credit is available for single filers with an MAGI between $80,000 and $90,000 and joint filers with an MAGI between $160,000 and $180,000.

To qualify for the maximum Lifetime Learning Credit, your MAGI must be below $53,000 if you’re a single filer and $107,000 if you’re a joint filer. A partial credit is available for single filers with an MAGI between $53,000 and $63,000 and joint filers with an MAGI between $107,000 and $127,000.

American Opportunity credit can help with college expenses

The American Opportunity credit is a tax credit that covers the first four years of your, your spouse’s or your child’s undergraduate education. Graduate and professional-level courses aren’t eligible. The credit is worth a maximum of $2,500 per eligible student . It’s calculated as 100 percent of the first $2,000 of tuition and related expenses that you’ve paid for the year, plus 25 percent of the next $2,000 of such expenses.

To take the credit, both you and your child must clear some hurdles:

  • Your child must attend an eligible educational institution as defined by the IRS (generally, any post-secondary school that offers a degree program and is eligible to participate in federal aid programs qualifies).
  • Your child must attend college on at least a half-time basis.
  • You must claim your child as a dependent on your tax return. If your child has paid the tuition expenses, you can still take the credit as long as you claim your child as a dependent on your return. But if your child has paid the tuition expenses and isn’t claimed as a dependent on your return, your child can take the credit on his or her own return.
  • Your child can’t have a felony drug conviction at the end of the year.

The American Opportunity credit can be taken for more than one student in the same year, provided each student qualifies independently. So, if you have twins who are in their freshman year of college, your credit would be worth $5,000. However, there are other restrictions. You can’t take both the American Opportunity credit and the Lifetime Learning credit in the same year for the same student. And whatever education expenses you cover with a tax-free distribution from your 529 plan or Coverdell education savings account cannot be the same expenses you use to qualify for the American Opportunity credit.

Lifetime Learning Credit can help with college, graduate school, and individual course expenses

The Lifetime Learning credit is a tax credit for the qualified education expenses that you, your spouse, or your child incur for courses taken to improve or acquire job skills. The Lifetime Learning credit is much less restrictive than the American Opportunity credit. In addition to college expenses, the Lifetime Learning credit covers the tuition expenses of graduate students and students enrolled less than half-time.

The Lifetime Learning credit is generally worth a maximum of $2,000. It’s calculated as 20 percent of the first $10,000 of tuition and related expenses that you’ve paid for the year.

One major difference between the American Opportunity credit and the Lifetime Learning credit is that the Lifetime Learning credit is generally limited to a total of $2,000 per tax return, regardless of the number of students in a family who may qualify in a given year. So if you have twins who are in their senior year of college, your Lifetime Learning credit would be worth $2,000, not $4,000.

As with the American Opportunity credit, if you withdraw money from your 529 plan or Coverdell ESA in the same year that you claim the Lifetime Learning credit, your withdrawal cannot cover the same expenses that you use to qualify for the Lifetime Learning credit.

My child is in college–how do I know which credit to take?

The American Opportunity credit and the Lifetime Learning credit cannot be claimed in the same year for the same student, so you’ll need to pick one. Because the American Opportunity tax credit is available for all four years of undergraduate education, is worth more, and the income limits to qualify are higher, that credit will probably be your first choice. But if your child is attending school less than half-time, the Lifetime Learning credit will be your only option.

How do I claim either credit on my tax return?

You should receive Form 1098-T from the college, showing the tuition expenses you’ve paid for the year. Then, at tax time, you must file Form 8863 to take either credit. If you are married, you must file a joint return to take either credit. For more information, see IRS Publication 970 or consult a tax professional.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Estate Planning and 529 Plans

Estate Planning and 529 Plans

When you contribute to a 529 plan, you’ll not only help your child, grandchild, or other loved one pay for college, but you’ll also remove money from your taxable estate. This will help you minimize your tax liability and preserve more of your estate for your loved ones after you die. So, if you’re thinking about contributing money to a 529 plan, it pays to understand the gift and estate tax rules.

Overview of gift and estate tax rules

If you give away money or property during your life, you may be subject to federal gift tax. These transfers may also be subject to tax at the state level.

Federal gift tax generally applies if you give someone more than the annual gift tax exclusion amount. Currently, $14,000, during the tax year. There are several exceptions, though, including gifts you make to your spouse. That means you can give up to $15,000 each year, to as many individuals as you like, federal gift tax free.

Contributions to a 529 plan are treated as (federal) gifts to the beneficiary

A contribution to a 529 plan is treated under the federal gift tax rules as a completed gift from the donor to the designated beneficiary of the account. Such contributions are considered present interest gifts and qualify for the annual federal gift tax exclusion. This means that you can contribute up to $15,000 per year to the 529 account of any beneficiary without incurring federal gift tax.

So, if you contribute $16,000 to your daughter’s 529 plan in a given year, you’d ordinarily apply this gift against your $15,000 annual gift tax exclusion. This means that although you’d need to report the entire $16,000 gift on a federal gift tax return, you’d show that only $1,000 is taxable. Bear in mind, though, that you must use up your federal applicable exclusion amount ( $11,700,000 in 2021) before you’d actually have to write a check for the gift tax.

Special rule if you contribute over $14,000 in a year

Section 529 plans offer a special gifting feature. Specifically, you can make a lump-sum contribution to a 529 plan of up to $70,000, elect to spread the gift evenly over five years, and completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period. A married couple can gift up to $140,000.

If you contribute more than $75,000 ($140,000 for joint gifts) to a particular beneficiary’s 529 plan in one year, the averaging election applies only to the first $75,000 ($150,000 for joint gifts). The remainder is treated as a gift in the year the contribution is made.

What about gifts from a grandparent?

Grandparents need to keep the federal generation-skipping transfer tax (GSTT) in mind when contributing to a grandchild’s 529 account. The GSTT is a tax on transfers made during your life and at your death to someone who is more than one generation below you. This would be someone like a grandchild. The GSTT is imposed in addition to (not instead of) federal gift and estate taxes. Like the basic gift tax exclusion amount, though, there is a GSTT exemption (also 11,580,000 in 2020). No GSTT will be due until you’ve used up your GSTT exemption, and no gift tax will be due until you’ve used up your applicable exclusion amount.

If you contribute no more than $15,000 to your grandchild’s 529 account during the tax year, there will be no federal tax consequences. Your gift qualifies for the annual federal gift tax exclusion, and it is also excluded for purposes of the GSTT.

If you contribute more than $15,000, you can elect to treat your contribution as if made evenly over a five-year period. Only the portion that causes a federal gift tax will also result in a GSTT.

What if the owner of a 529 account dies?

If the owner of a 529 account dies, the value of the 529 account will not usually be included in his or her estate. Instead, the value of the account will be included in the estate of the designated beneficiary of the 529 account.

There is an exception, though. It would be if you made the five-year election and died before the five-year period ended. In this case, the portion of the contribution allocated to the years after your death would be included in your federal gross estate.

Some states have an estate tax like the federal estate tax; many states calculate estate taxes differently. Review the rules in your state so you know how your 529 account will be taxed at your death.

When the account owner dies, the terms of the 529 plan will control who becomes the new account owner. Some states permit the account owner to name a contingent account owner. They would assume all rights if the original account owner dies. In other states, account ownership may pass to the designated beneficiary. Alternatively, the account may be considered part of the account owner’s probate estate and may pass according to a will. Or through the state’s intestacy laws if there is no will.

What if the beneficiary of a 529 account dies?

If the designated beneficiary of your 529 account dies, look to the rules of your plan for control issues. Generally, the account owner retains control of the account. The account owner may be able to name a new beneficiary or else make a withdrawal from the account. The earnings portion of the withdrawal would be taxable, but you won’t be charged a penalty for terminating an account upon the death of your beneficiary.

Keep in mind that if the beneficiary dies with a 529 balance, the balance may be included in the beneficiary’s taxable estate.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Saving for Retirement and a Child’s Education at the Same Time

Saving for Retirement and a Child’s Education at the Same Time

You want to retire comfortably when the time comes. You also want to help your child go to college. So how do you juggle the two? The truth is, saving for your retirement and your child’s education at the same time can be a challenge. But take heart–you may be able to reach both goals if you make some smart choices now.

Know what your financial needs are

The first step is to determine what your financial needs are for each goal. Answering the following questions can help you get started:

For retirement:

  • How many years until you retire?
  • Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what’s your balance? Can you estimate what your balance will be when you retire?
  • How much do you expect to receive in Social Security benefits? (You can estimate this amount by using your Personal Earnings and Benefit Statement, now mailed every year by the Social Security Administration.)
  • What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply?
  • Do you or your spouse expect to work part-time in retirement?

For college:

  • How many years until your child starts college?
  • Will your child attend a public or private college? What’s the expected cost?
  • Do you have more than one child whom you’ll be saving for?
  • Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
  • Do you expect your child to qualify for financial aid?

Many on-line calculators are available to help you predict your retirement income needs and your child’s college funding needs.

Figure out what you can afford to put aside each month

After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you’ll need to prepare a detailed family budget that lists all of your income and expenses. Keep in mind, though, that the amount you can afford may change from time to time as your circumstances change. Once you’ve come up with a dollar amount, you’ll need to decide how to divvy up your funds.

Retirement takes priority

Though college is certainly an important goal, you should probably focus on your retirement if you have limited funds. With generous corporate pensions mostly a thing of the past, the burden is primarily on you to fund your retirement. But if you wait until your child is in college to start saving, you’ll miss out on years of tax-deferred growth and compounding of your money. Remember, your child can always attend college by taking out loans (or maybe even with scholarships), but there’s no such thing as a retirement loan!

If possible, save for your retirement and your child’s college at the same time

Ideally, you’ll want to try to pursue both goals at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child’s college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8 percent, you’d have $18,415 in your child’s college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment.)

If you’re unsure how to allocate your funds between retirement and college, a professional financial planner may be able to help you. This person can also help you select the best investments for each goal. Remember, just because you’re pursuing both goals at the same time doesn’t necessarily mean that the same investments will be appropriate. Each goal should be treated independently.

Help! I can’t meet both goals

If the numbers say that you can’t afford to educate your child or retire with the lifestyle you expected, you’ll have to make some sacrifices. Here are some things you can do:

  • Defer retirement: The longer you work, the more money you’ll earn and the later you’ll need to dip into your retirement savings.
  • Work part-time during retirement.
  • Reduce your standard of living now or in retirement: You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.
  • Increase your earnings now: You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.
  • Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively.
  • Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.
  • Send your child to a less expensive school: You may have dreamed your child would follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Don’t feel guilty–a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.
  • Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead for four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.

Can retirement accounts be used to save for college?

Yes. Should they be? Probably not. Most financial planners discourage paying for college with funds from a retirement account; they also discourage using retirement funds for a child’s college education if doing so will leave you with no funds in your retirement years. However, you can certainly tap your retirement accounts to help pay the college bills if you need to. With IRAs, you can withdraw money penalty free for college expenses. Even if you’re under age 59½ . But with an employer-sponsored retirement plan like a 401(k) or 403(b), you’ll generally pay a 10 percent penalty on any withdrawals made before you reach age 59½. This is even if the money is used for college expenses. You may also be subject to a six month suspension if you make a hardship withdrawal. There may be income tax consequences, as well.

Let a professional help you make important financial decisions

Contact us today and set up a complimentary consultation with one of our advisors. They can review your current financial situation, and make sure that you are making the best decisions for your financial future.


Disclosure
:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

How Student Loans Impact Your Credit

How Student Loans Impact Your Credit

If you’ve finished college within the last few years, chances are you’re paying off your student loans. What happens with your student loans now that they’ve entered repayment status will have a significant impact. This can be positive or negative on your credit history and credit score.

It’s payback time on your student loans

When you left school, you enjoyed a grace period of six to nine months before you had to begin repaying your student loans. But they were there all along. Once the grace period was over, the reality hits. How is it now affecting your ability to get other credit?

One way to find out is to pull a copy of your credit report. There are three major credit reporting agencies, or credit bureaus. They are, Experian, Equifax, and Trans Union. You should get a copy of your credit report from each one. Keep in mind, though, that while institutions making student loans are required to report the date of disbursement, balance due, and current status of your loans to a credit bureau. They’re not currently required to report the information to all three, although many do.

If you’re repaying your student loans on time, then that is actually helping you establish a good credit history. But if you’re seriously delinquent or in default on your loans, this can seriously undermining your efforts to get other credit.

What’s your credit score?

Your credit report contains information about any credit you have. Including credit cards, car loans, and student loans. The credit bureau may use this information to generate a credit score. A credit score statistically compares information about you to the credit performance of a base sample of consumers with similar profiles. The higher your credit score, the more likely you are to be a good credit risk. Thus, the better your chances of obtaining credit at a favorable interest rate.

Many different factors are used to determine your credit score. Some of these factors carry more weight than others. Significant weight is given to factors describing:

  • Your payment history, including whether you’ve paid your obligations on time, and how long any delinquencies have lasted
  • New credit, including how many inquires or applications for credit you’ve made, and how recently you’ve made them
  • Your outstanding debt, including the amounts you owe on your accounts, the different types of accounts you have, and how close your balances are to the account limits
  • Your credit history, including how long you’ve had credit, how long specific accounts have been open, and how long it has been since you’ve used each account

Student loans and your credit score

Always make your student loan payments on time. Otherwise, your credit score will be negatively affected. To improve your credit score, it’s also important to make sure that any positive repayment history is correctly reported by all three credit bureaus, especially if your credit history is sparse. If you find that your student loans aren’t being reported correctly to all three major credit bureaus, ask your lender to do so.

But even when it’s there for all to see, a large student loan debt may impact a factor prospective creditors scrutinize closely. They will look to your debt-to-income ratio. A large student loan debt may especially hurt your chances of getting new credit if you’re in a low-paying job, and a prospective creditor feels your budget is stretched too thin to make room for the payments any new credit will require.

Moreover, if your principal balances haven’t changed much, or if they’re getting larger, it may look to a prospective lender like you’re not making much progress on paying down the debt you already have.

Getting the monkey off your back

Like many people, you may have put off buying a house or a car because you’re overburdened with student loan debt. So what can you do to improve your situation? Here are some suggestions to consider:

  • Pay off your student loan debt as fast as possible. Doing so will reduce your debt-to-income ratio, even if your income doesn’t increase.
  • If you’re struggling to repay your student loans and are considering asking for a forbearance, ask your lender instead to allow you to make interest-only payments. Your principal balance may not go down, but it won’t go up, either.
  • Ask your lender about a graduated repayment option. In this arrangement, the term of your student loan remains the same, but your payments are smaller in the beginning years and larger in the later years. Lowering your payments in the early years may improve your debt-to-income ratio. Larger payments later may not adversely affect you if your income increases as well.
  • If you’re really strapped, explore extended or income-sensitive repayment options. Extended repayment options extend the term you have to repay your loans. Over the longer term, you’ll pay a greater amount of interest, but your monthly payments will be smaller, thus improving your debt-to-income ratio. Income-sensitive plans tie your monthly payment to your level of income. The lower your income is, the lower your payment. This also may improve your debt-to-income ratio.
  • If you have several student loans, consider consolidating them through a student loan consolidation program. This won’t reduce your total debt, but a larger loan may offer a longer repayment term or a better interest rate. While you’ll pay more total interest over the course of a longer term, you’ll also lower your monthly payment. This in turn will lower your debt-to-income ratio.

If you’re in default on your student loans, don’t ignore them. They aren’t going to go away. Student loans generally cannot be discharged even in bankruptcy. Ask your lender about loan rehabilitation programs . Successful completion of such programs can remove default status notations on your credit reports.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.