College & Your Credit Score: Tax Time Tips for College Loan Recipients

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This is a continuation of The OCM Blog’s “College and Your Credit Score” series – a way to make heads and tails of your finances while you’re in school, so you can avoid any financial headaches once you’re done school. While we do believe you should seek your own financial advice at the end of the day, take some time to read our pieces on why maintaining good credit is important and some tips on spending smart during your college years, and keep reading this post to learn about how to make tax time less of a headache, especially if you have student loans.

 

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April 15: it’s a day that many of us dread. It’s Tax Day, and for millions of Americans, it’s the day we have to pay the piper. For those of us with a decent-sized outstanding college loan, this can cause great trepidation. After all, we have to pay our college loan monthly. If that payment is itself substantial, writing a check for another large sum at tax time can decimate a family’s savings.Luckily, the federal government does offer some programs to give you credit for your student loan payments. There is also plenty you can do to use your loans to lessen your overall tax burden.

 

Total up your student loan interest deduction

This is an easy one to do. Essentially, the money you pay in interest on an educational loan should be tax-free. As with most things, there is a limit to how much you can deduct and what types of loans qualify for deductions, but this is an essential first step to claiming as much as you can for your taxes.

 

Take advantage of tax credits

If you are a current student already making tuition payments, you likely qualify for the American Opportunity Tax Credit. If you are a nontraditional student or are taking work skill courses, you may qualify for the Lifetime Learning credit. Either way, these can help you save a bit more come tax time. If you’re looking for more information on which credit works for you, the IRS’ dedicated education credits page gives you the lowdown on how you can determine which credit fits your situation.

 

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IRS Form 8863 allows you to take education credits to lower your total tax owed.

 

Loans in default will get paid from other income

Imagine that you file your tax return and see that you’re supposed to be getting a hefty sum back. However, after weeks of waiting for your check to arrive, you still haven’t received a thing. As it turns out, your return may run the risk of getting garnished due to a student loan in default. The truth is, failing to pay your student loans will have consequences beyond just your credit report. Make sure your loan payments are up to date before you file your returns!

 

Pell Grants aren’t taxable income

While it may sound a little disheartening, it’s the truth – many grants and scholarships must be recognized as income by the recipient. However, the Pell Grant program is a notable exception to this rule. So long as you are a degree candidate at the college and only use the funds to pay for tuition, fees, books, supplies, and equipment, you should be fine. However, it’s important to note that funds used to pay for room, board, or school-related travel incur taxable benefits, so ensure your Pell Grant is used as it should be.

 

Work-Study earnings are taxable income

Part of your FAFSA award may include working at your college or university in order to earn a certain amount of money to go towards your tuition. These work-study programs are federally underwritten, but they are designed to put the money earned in student’s’ hands. It effectively works like any other income, and is taxed as such.

 

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Ask a professional for help

While it is absolutely possible to do taxes on your own (finance majors, we’re looking at you), doing them on your own opens the possibility of missing something. Think of it like writing a paper: you could edit it on your own, sure, but having someone else read over it may give you an outside perspective. Having a tax professional at least look over your numbers is a way of having an “editor” for your tax return. It’s a great way to ensure that you are fully covered and have received every deduction to which you are entitled.

Again, we stress that it’s important to seek professional help when it comes to getting your tax time ducks in a row. However, take a look at some of these tips, and see if you’re able to apply them to your situation. Who knows, you might just owe Uncle Sam a little less this time around!

College & Your Credit Score: Ways to Improve “Real-World” Spending

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In our first part of “College and Your Credit Score,” we talked about what your credit score is and why college kids should care. If you want to get ready (and ahead) in the real world of spending, follow these five simple steps to get your finances in check before graduation.

 

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Apply for the right credit

Before you can get a credit score, you need credit. One of the easiest ways to do this is to apply for a credit card. While you can apply for your own if you’re 18 or older, you may want to consider asking your parents (so long as they have good financial sense) to add you to their card or become a cosigner on yours. This will help keep you from overspending.

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If you already have credit, and it’s not very good, make sure you shop around for a card that offers low interest, as well as no signup or maintenance fees. Over time, these extra, hidden fees can add up and cost you even more.

Learn your limits

During your first few months with a credit card, you may be torn on how and when to use it. Make sure you use as much caution as possible. Start by making a budget. Add up your paychecks and any other income, and subtract whatever you spent. If you earned more than you spent, you’re on the right track. If your expenses are exceeding your income, however, make sure you’re extremely diligent with your cards so you don’t end up using them to cover your overages.

Once you know how much you can spend, try using your card only for essential purchases — items like groceries or gas. Each purchase will boost your credit score as long as you stay within your budget.

Develop good habits

Good credit habits start with paying off your credit card each month. When you’re starting off, you’ll want to pay all of your balance back. This will keep you from accruing extra interest or fees on your purchases. One way to do this is to go in daily or weekly and pay off whatever you spent.

If you develop a good habit like paying off your expenses, you may be able to carry a little debt down the road. Just remember that your credit-to-debt ratio should be as low as possible. A 10% ratio (for example, $100 on a card with a limit of $1,000) is considered healthy and won’t overwhelm you when you try to pay it back.

 

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Good habits will also help you when it comes to your student loans. Because you’re not paying back your loans now, it’s easy to forget that they are there. If you have the extra income and ability to do so, you can start building your credit now by simply paying off a bit of your student loans each month.

Check up on your finances

Knowing what your credit score is can be tricky. Your bank won’t tell you, your mom won’t know, and apps or add-ons from the credit card companies will only give you an estimate based on their knowledge of you.  Luckily, you can check your credit score for free once a year by visiting annualcreditreport.com. You should do this at the same time every year (a good idea is the New Years).

When you look over your score, also look at the credit lenders and payments made. It should be accurate and list all of your lenders. If you see something unfamiliar, you may be a victim of credit fraud (which can severely damage your finances if you don’t act quickly). If you see something incorrect, call the number listed for the three credit bureaus and ask for a review. They will walk you through how to report something inaccurate or a possible identity theft.

By starting to build your credit score now by checking your numbers, building good habits, and learning the basics, you can have a great head start on the real world. After all, your finances start to matter now, so there’s no time to lose!

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College and Your Credit Score: Why It’s Important

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You’ve probably heard your parents talk about their credit score, and there’s always news reports and articles out there on how to get a better one. But, do you know what a credit score is, and why – as a college student – you should care? As an important part of managing your personal finance, having an understanding of how this score can affect you can save you down the road. Here’s what you need to know about your credit score.

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What is a credit score?

Credit is any money loaned to you. This could be the credit card you carry around, or the loan you used to pay off your college tuition bill. The history you have with this credit is looked at and evaluated, and just like your tests, you are given a number based on how you have handled and managed it by three credit bureaus – TransUnion, Equifax, & Experian.

That number is your credit score. It ranges from a 300-850, 300 being the lowest and 850 being perfect. The average person should shoot for a 700 or better — roughly the equivalent of a B on a grading scale.

How do you get a credit score?

Your credit score number is determined by many factors. As a younger person with not much history (that is time having credit), your score will most likely start lower in the 5-600 range. To build it up, you will need to have a good payment history and a low debt-to-credit ratio. For example, if you have a credit card with an available balance of $1,000 and you carry a balance of only $200 after making minimum monthly payments on-time each month, your debt-to-credit ratio is 200/1000 or 20%.

However, getting a credit score isn’t that easy. As you may have noticed from applying for student loans without an already established credit score, you may need someone to cosign with you on your loans or credit cards. This is because history is on your side. If you do not have a credit card or loan of some sort, you’ll never get a credit score, and that could hurt you in the future.

Why it’s important to a college student

So why not go without? Why not just avoid credit scores altogether by sticking to your debit card or paying cash?
For one, paying in cash may not be available to you in the future. For example, your car breaks down and you need one to get to work. You can pay for much of it in cash, but you don’t have the funds to pay the rest. Having a credit score can help you get a car loan to pay the rest.

In addition, that credit score will determine the amount of interest you pay. So for that car loan, having a credit score of 500 may mean paying thousands more in interest over time than if you had a good credit history and credit score of 700. This is especially important for larger loans such as your student loans for graduate school or if you decide to buy a home.

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And there are other repercussions too! Many landlords look at your credit score to determine if you will pay rent on time, or if you have the history to show responsibility for a regular expense.  Not having a credit score or having an extremely low one may make your chances of getting an apartment or building wealth on your own practically impossible.

As a college student, it is important to consider building both your credit and credit history now. One option is to apply for a very small credit card which you only use for emergencies or a few essential purchases here and there. Pay it back every month and build up your on-time payments. By the four years of college, you’ll have a strong score that will ensure you’re ready for what waits you and your money after graduation.

This is a two-part post on the importance of establishing credit while still attending college. For tomorrow’s post, we’ll outline some tips you can use to make sure you’re able to build (and keep) good credit.