Housing and Economic Insights Report – May 2022

Graduation season is here and many seniors are shifting their focus toward life after college. While new jobs and big moves might be top of mind for new grads, their credit scores are deeply connected to this next phase of life and one of the most important things to think about even before getting their diplomas.

Credit and college are not always hand in hand

Credit scores are the key to long-term financial success, used for a number of essentials like getting an apartment, setting up utilities, and getting car insurance. The most basic concept of credit is that the better an individual’s credit score is, the more options they will have when shopping for credit products and the lower their interest rates will be. Data from the Federal Reserve, for example, shows that the majority of auto loan originations are for individuals who have credit scores above 700.

Source: New York Fed Consumer Credit Panel / Equifax

Though having good credit at graduation dictates so much of a student’s financial future, a combined 43% of students either don’t know their FICO® Score (24%) or don’t have one at all (19%). According to the 2019 study by Sallie Mae and Ipsos Public Affairs, at graduation, the number of students who don’t have or don’t know their FICO® Score drops to a combined total of 16%. Still, that leaves nearly one out of every six graduates either unscored or unsure of what their score might be.

Source: Sallie Mae and Ipsos Public Affairs, 2019

The looming problem of student loan debt

There’s another key factor that emphasizes the importance of credit scores for college students: a good score’s ability to refinance student loans.

Student loan debt is pervasive in the United States. According to the Federal Reserve, Americans owe a staggering $1.76 trillion dollars in student loan debt. About 43.4 million Americans have outstanding student loans of which 7.41 million borrowers are 24 or younger. These 24 and under individuals have a total average debt of $20,803 and the average student loan debt was $18,878. 

Source: New York Fed Consumer Credit Panel / Equifax

A lot of these graduates are likely to want to refinance their loans at some point in order to save on debt payments, but the refinancing process is anything but simple. To do so, graduates need to shop around for the best interest rate which is based on many factors, including the type of loan they have, the remaining time left on the loan, and the borrower’s credit score. 

According to Experian, a minimum credit score of 670 is needed to refinance loans. If we refer back to the Sallie Mae study (Figure 2), 40% of graduates  (who reported a credit score above 751) would safely fall into that range. That percentage falls dramatically (only 8%) for those who did not graduate college, but may have taken on significant student loan debt in the process. 

Lack of steady income may make it difficult for college-aged students to build credit before graduating

It’s not just that many college-age students don’t have strong credit, they’ve generally been given fewer opportunities to build it. According to Experian, in 2021 the average FICO score in the United States was 714 while it was 679 for Gen Z (ages 18-24).  

Of those Gen Z Americans who did have a credit score, one of the biggest factors in score strength was whether or not an individual had a credit card. According to VantageScore, people in this group who had a credit card had an average score that was 83 points higher than those who didn’t have one. 

So why not get a credit card in college to build credit?

Since 2009, with the implementation of the CARD Act (Credit Card Accountability, Responsibility and Disclosure Act) it has become even more difficult for students to obtain credit cards. Those under the age of 21 can not open a credit card without a cosigner or proving they have the income to make credit card payments. While this law protects students from making bad financial decisions without a steady income, it highlights the need to have other ways for students to establish their credit scores – especially for those who do not have a cosigner available to them.

Graduating with a diploma in one hand and a credit score in the other

Paying off student loans is a great way to build credit, but most students do not start paying off their loans until after graduation when they have a steady income. Another option is offering rent reporting services to students which can help them establish credit scores long before graduation. 

Rent is the largest monthly payment most students make each month, whether living on- or off-campus. When students cannot easily access a credit card and haven’t started to pay off their student loans, reporting on-time rent payments to the credit bureaus can be a financially-stable entry point to credit building. 

Our long-time partner the University of Minnesota has seen this first-hand by bringing rent reporting to its student body. Between February 2019 and April 2022, the average credit score has increased from 629 to 698 points, surpassing the Experian-reported 670-point eligibility to refinance student loans at graduation. Rent reporting is more than a financial tool for students, it’s a differentiated amenity for university or private student housing.

Want to learn more about helping students graduate with a diploma in one hand and a credit score in another? Contact us at sales@esusu.org