How Student Loans Impact Your Credit Score
For many individuals, financing a college education involves borrowing money, leading to the question: "Do student loans affect your credit score?" Given the significance of credit in various aspects of consumer life, understanding the relationship between student loans and credit scores is crucial. Credit scores influence the likelihood of approval for credit cards, auto loans, mortgages, and other forms of credit.
Understanding Credit Scores
A credit score is a numerical representation of an individual's creditworthiness, calculated based on information in their credit report. FICO scores, a widely used type of credit score, range from 300 to 850, with higher scores indicating better creditworthiness. An excellent credit score is generally considered to be 850.
Five key categories determine a credit score:
- Payment History (35%): This is the most significant factor, reflecting the consistency of on-time payments.
- Amount of Debt Owed (30%): This considers the total amount of outstanding debt.
- Length of Credit History (15%): A longer credit history typically indicates a more reliable borrower.
- Types of Credit Used (10%): Also known as credit mix, this assesses the variety of credit accounts, such as credit cards and loans.
- New Credit Activity (10%): This evaluates the frequency of opening new credit accounts.
How Student Loans Appear on Your Credit Report
Student loans are classified as installment loans, similar to car loans, personal loans, or mortgages. When you take out student loans, they show up on your credit report as installment loans. Each loan you accept may be listed as a separate account under your name. The information updates regularly and helps shape your credit score. Your credit report lists your student loans details, including Loan Type, Loan Amount, Loan Servicer, Account Status (current, deferred, delinquent, etc.). As such, they become part of your credit report and can influence payment history, length of credit history, and credit mix.
Building Credit with Student Loans
Student loans can be a credit-building opportunity if you manage them wisely. Here are our top tips:
Read also: Credit Score Guide
On-Time Payments: Making consistent, on-time payments is one of the best ways to build your credit. Even during school or grace periods, if payments are required (like with some private loans), be sure not to miss them.
Long Credit History: The age of your credit accounts matters. The longer your loans stay open and in good standing, the better it is for your credit score.
Credit Mix: Having both installment credit (loans) and revolving credit (credit cards) can boost your score by showing you can manage different types of credit. However, it’s crucial to not take on more debt than your future finances can handle.
Undergraduate student loans are one way you can build your credit history. If you consistently make on-time payments, student loans can have a positive impact on your credit score.
Potential Negative Impacts of Student Loans
Unfortunately, mishandling your loans can do real damage to your score. Avoid these common mistakes:
Read also: College Credit Explained
Missed or Late Payments: Your payment history makes up 35% of your credit score. One missed payment can cause a dip in your score. Multiple late payments or delinquencies can have a long-lasting impact. Your payment history is the biggest factor in your credit score - it accounts for 35% of your FICO score. Late payments on any outstanding debt, including credit card balances or student loans, can negatively impact your credit score and stay on your credit report for up to seven years. Late student loan payments may also affect your eligibility for federal benefits, including loan forgiveness programs.
Defaulting on Your Loan: Failing to repay a loan as agreed can severely damage your credit and may stay on your report for up to seven years. It also makes you ineligible for additional federal aid until resolved and can prevent you from receiving other credit like personal loans or credit cards. Defaulting on a student loan may result in withheld wages and no further access to federal aid until the debt is settled or a repayment plan has been approved.
High Loan Balances: While student loans don’t affect your credit utilization like credit cards do, a large balance may impact your debt-to-income ratio (DTI), which lenders may consider when you apply for other types of credit.
Common Loan Situations and Their Impact
In-School Deferment: Loans are often deferred while you’re enrolled in school. As long as your loans are in good standing, deferment doesn’t hurt your credit.
Grace Period: After graduation, or dropping below half-time status, you typically have a six-month grace period before repayment begins. Use this time to plan your budget and prepare for payments-your credit depends on it.
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Forbearance or Deferment: If you’re struggling to make payments due to hardship, you may qualify for forbearance or deferment. These options pause your payments without hurting your credit, but interest may still accrue.
Consolidation: Consolidating your loans can make repayment easier, but it may close older accounts and affect the average age of your credit, which could temporarily impact your score.
Protecting Your Credit While Managing Loans
Set Up Automatic Payments: Auto pay ensures you never miss a due date. Some loan servicers even offer an interest rate discount when you enroll in auto pay. Setting up automatic payments or reminders can ensure your bills are paid on time each month. This helps you avoid late fees and build your credit score with a positive payment history.
Monitor Your Credit Regularly: You can get a free credit report from each of the three bureaus once a year at AnnualCreditReport.com. It’s a good habit to check for errors or signs of identity theft. Review your credit report regularly for inaccuracies.
Avoid Default: Explore all your repayment options and stay proactive. Default can be avoided if you act early and ask for help.
Communicate with Your Loan Servicer: If you’re having trouble making payments, don’t ignore it. Reach out to discuss alternate repayment options or ways you may be able to postpone your loan payments for a period of time. It’s a tough conversation but one that can save you a lot of trouble down the line. If you think you may not be able to make your student loan payments, contact your servicer to find out more options.
Additional Considerations
Credit Inquiries: When you apply for credit, the lender may pull your credit report to help make a lending decision. This is sometimes called a hard inquiry. A hard inquiry may lower your credit score. By how much depends on the credit model and your credit history. Most federal student loans do not require a hard inquiry on your credit report. Currently, Direct PLUS loans are the only federal student loan option that requires a hard inquiry. This type of loan is only available to graduate and professional students, and parents of dependent undergraduate students. On the other hand, private student loans may require a hard credit inquiry, which can impact your credit score. A hard inquiry can affect your credit score for up to a year and appear on your credit report for up to two years. A flurry of credit applications in a short period can also signal that you’re taking on more debt than you can handle, making you riskier to lenders. By being deliberate about new credit applications, you can protect your credit score from unnecessary drops.
Credit History Length: Having an older average age of credit accounts tends to be better. After you receive a student loan, it will be reported by the lender to the credit reporting agencies and added to your credit report. This will help you build your credit history. Length of credit is a part of the “credit depth” factor, which makes up 21% of your credit score factor. Because credit scoring models tend to favor active accounts, once a student loan account is paid and closed, you may see a drop in your credit score, due to the resulting decrease in average age of your active credit accounts. Keeping older credit accounts open can also benefit your credit score. Long-standing accounts can positively contribute to your credit history length, which makes up 15% of your FICO score. A longer credit history can give lenders a better idea of how you’ve borrowed and repaid debt over the years. Even if you rarely use your older accounts, keeping them open can help improve your credit utilization ratio.
Student Loan Tracking: Make sure to track all your loans, noting their repayment dates and monthly payment amounts, so you can adjust your budget and avoid missed payments. There are online tools available to help you track your student loans, or you can create your own spreadsheet. Consider consistently monitoring your credit report as well to be sure your payments and balances are reported correctly.
Removing Loans from Credit Report: There is nothing you need to do to remove student loans from your credit report. Loans closed in good standing will remain on your credit report for up to 10 years. Adverse information, like a missed payment, can remain on your credit report for seven years.
Multiple Loans and Servicers: You will likely have several student loans on your credit report since you tend to get a new loan each semester and some loans may have different servicers. Plus, loans can be transferred to a different servicer. You can use the loan information in the account information section of your credit report to contact the servicer directly. If you suspect you’ve been the victim of fraud, you can submit a dispute.
Refinancing Student Loans: When you refinance your student loans, a lender will pay off your debt and issue a new private student loan. This new loan may come with a lower interest rate or a different term or length of time you have to pay the loan. Over time, it could save you quite a bit of interest. It could also lower your monthly payment amount while lengthening your repayment term. While refinancing can save you money, it can also pose downsides. When you refinance your federal loans to a private student loan, you can no longer tap any of the benefits that come with the federal program, such as income-driven repayment, loan forgiveness, forbearance or deferment.
Income-Driven Repayment (IDR) Plans: Through an IDR plan, you could reduce your monthly payment amount based on your discretionary income. A lower monthly student loan payment can mean being able to better manage other types of debt, leading to an improved credit score. These plans also offer eventual forgiveness on your remaining debt after a determined period of repayment.
Pandemic Forbearance and Credit Scores
The pandemic forbearance on federal student loans naturally had a rather large impact on credit scores for affected borrowers. Page 8 of the Student Loan Update shows an 11-point increase in median credit scores for student loan borrowers from the end of 2019 to the end of 2020; however, these increases were particularly large for borrowers who had a previous delinquency. The 2020 forbearance marked all delinquent (but not defaulted) loans as current, causing a jump of 74 points, from 501 to 575, in the median score between 2019:Q4 and 2020:Q4 for those borrowers who were previously delinquent but not defaulted. Defaulted borrowers saw a gradual rise in credit scores as their negative marks aged and as some borrowers voluntarily rehabilitated their defaulted loans. However, in the fourth quarter of 2022, the Fresh Start program marked all defaulted loans as current, increasing the median score for those with a default in 2019 by 44 points, from 564 in 2022:Q1 to 608 in 2023:Q1. By the end of 2024, those borrowers with loans in delinquency or in default saw scores that were 103 and 72 points higher, respectively, than at the end of 2019.
Potential Future Delinquencies
Delinquencies will hit credit reports over a rolling window as borrowers with missed payments advance beyond 90 days past due. As such, the 2025:Q1 Quarterly Report on Household Debt and Credit will likely reveal a significant uptick in the delinquency rate for student loans, but the size of this increase is difficult to pin down.
Impact of New Delinquencies on Credit Scores
Using data from 2016 to 2019, estimates show the credit score impact of a new reporting of a 90 (or more) days past due student loan delinquency by borrower credit score band prior to the delinquency.
| Credit Score Before New Delinquency | Average Credit Score Change Associated with New Student Loan Delinquency |
|---|---|
| Less than 620 | -87 |
| 620-659 | -143 |
| 660-719 | -165 |
| 720-759 | -165 |
| 760 or higher | -171 |
Given these estimates, there is an expectation that many student loan borrowers may face substantial declines in credit standing. The aggregate impact on overall credit access due to these declines in credit scores will depend on the previous credit standing of those with past due loans.
Student Loans and Mortgage Eligibility
Student loans will appear on your credit report. Mortgage lenders will look at your credit history to determine your mortgage eligibility. Your loans, which include student loans, will be used to measure your debt-to-income ratio.
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