Building a credit score from loans won’t normally help. The loans won’t be in the positive column of the credit score until you start repayment, which wouldn’t be (usually) until 6-9 months after graduation. The debt might show on the credit score, but no payments made means no positive action.
^^We started payment early. We did not defer repayment until graduation.
This says nothing about our D’s inherent creditworthiness, except that we back her. But that’s the system and we are working it.
Interest on subsidized loans starts after completing the graduate/professional degree if there was no break between undergrad and grad/professional school.
Since loans are a year to year decision, and you can decide at any time during the year to take them, wait. You may find that some year you need more cash, maybe for a study abroad or to pay living expenses during an unpaid summer internship. If you are not eligible for subsidized loans, wait and take out the money when you need it. You might also consider a small loan senior year if you foresee your student needing start up costs for an apartment. My senior has a job in city too far from home to commute to and where she knows no one. If your funds are deleted from college, a few thousand for moving and security deposits can be repaid fairly quickly. But taking them just because? Nah.
We, too, heard about the “make them have some skin in the game”. What we did is have our DD take out the $5500 loan, but told her if she kept up a 3.0+ GPA we would pay back the loan.
If a student qualifies for subsidized loans, but can squeak by without them, is it a good idea to take out even a small one and pay it back in a short time to establish credit? What if the student wants to take advantage of the interest free loans to possibly use for study abroad expenses or for grad school expenses, is that a good idea or will having thousands of dollars sitting in a savings account cause a change in the FAFSA and they’d need to use some of that to pay for college? In other words, what are the potential downsides to accepting subsidized loans if they’re not absolutely necessary? Would taking out a small amount $1K or so and paying it back during the fall or spring semester help with credit? Is it too late for a student to take out a subsidized loan this year if classes are still in progress?
Just wanted to add that there’s already plenty of skin in the game, so that’s not an issue in our situation. Is it ever a good idea for the student to take a partial loan so the student doesn’t have to work while managing time consuming rigorous academics? Or is it better in the long run to graduate debt free?
We took out the $5500 loan to have her skin in the game. That was the only one we planned on taking, as we had a 529 acct for the rest. However, she ended up taking a summer class and having to drop a couple of classes for medical reasons and ended up going a semester longer than we planned on, so we ended up with another loan. We’ll help her with the payments if necessary. OTOH, one of her roommates graduated with a $880 a month student loan and could not afford that and her $300 month rent (she was sharing my D’s house). She ended up moving back home with her parents.
A credit score is established by having debt and repaying it. You don’t immediately go to an 850 by borrowing $1000 and paying it back in 4 months. It gets higher and higher by having different types of debt (installment, loan, mortgage) and paying as agreed. There are points awarded and lost based on how much availability you have (say a credit card with a $10k limit), how much of it you use (shouldn’t use more than 30% of availability), and if you pay it in on time.
Student loans paid on time will help a little with establishing a credit score but may not help that much. A credit card used wisely or a car loan may help more.
I’m wondering now, is it too late to take a $5500 subsidized loan as an undergrad for my daughter who graduates in a month? She could use that for graduate school instead of taking out an unsubsidized graduate loan. Can she do that if her bill has already been paid for this year?
Note that of the federal direct loan amounts that students can borrow ($5,500 the first year, increasing at higher class levels), no more than that amount minus $2,000 can be subsidized. I.e. first year students can borrow $3,500 in subsidized federal direct loans and an additional $2,000 in unsubsidized federal direct loans. Subsidized loans are only available to those with financial need.
https://studentaid.ed.gov/types/loans/subsidized-unsubsidized
In my daughter’s case, she’s never had to borrow for undergrad, but received about 50K in grants this year, so there is need but it was met with grants which don’t have to be repaid. She will be attending a grad program which provides for her tuition and fees but leaves her needing to borrow some to help with living expenses. Is it possible to take out $5500 now before graduation or is it too late?
You need to ask her FA office. If her entire COA -EFC was met with grants, she probably won’t qualify for subbed loans, but the undergrad unsubbed loans might be at a lower APR. In the end it will probably be a wash with borrowing the money earlier but at a lower rate.