Do Student Loans Affect Your Credit Score? | Student Loans and Advice

Student loans can have a major effect on your credit score, so it pays to understand the relationship between student loans and credit. Borrowing and paying back student loans can do wonders for your credit history but missteps like skipping payments or defaulting can send your score plummeting.

If you manage your student loans responsibly, they can help you build good credit. Here’s how:

The most heavily weighted factor in your credit score is your payment history, which makes up 35% of your score. That’s why one of the best things you can do for your credit is pay your student loan bill on time and in full every month.

You can also help your credit score by starting your student loan repayment ahead of schedule. Some lenders allow borrowers to make small payments – such as a flat $25 per month or interest-only payments – during in-school deferment and the grace period following graduation, says Mark Kantrowitz, a student loan expert and president of PrivateStudentLoans.guru. “These payments get reported as real payments on the borrower’s credit history, having a positive impact if the borrower makes them on time,” he says.

Your credit history is a record of how long you’ve been using credit, including how long various accounts have been open and active. It’s also a fairly important factor in your credit score, accounting for 15% of your FICO score.

However, college students may have a thin or nonexistent credit history since they’re young and inexperienced with borrowing money. Fortunately, even though not all student loans require a credit check, they all show up on the credit file of the borrower. For a student with limited credit history, this can have a dramatic impact on credit, says Kantrowitz.

In addition to a lengthy credit history, lenders like to see a diverse one. That’s why your credit mix, or types of credit used, makes up 10% of your FICO credit score. Whether it’s auto loans, credit cards, mortgages or student loans, the more types of credit you have on your file, the better it is for your score. Plus, if you don’t have a long credit history, a good credit mix may be even more impactful.

Managing student loans responsibly and making payments on time has a positive impact on your score. So what about paying them off completely?

You might be surprised to find that your credit score drops a bit after paying off a loan. Once the account is closed and no longer active, the positive payment history won’t contribute to your score as significantly. However, the impact of paying off a loan will be beneficial in the long run. It shows lenders that you held up your end of the lending agreement. Plus, you’ll have more income available to put toward reducing other debts, which can help your debt-to-income ratio. So you should see your credit score improve in a couple of months.

The same is true if some or all of your student loans are forgiven. However, there may be tax consequences for the year they are forgiven. Unpaid tax debt doesn’t impact your credit score directly, but it can lead to financial complications.

You could have a similar experience if you refinance your student loan debt. In the short term, you might receive a ding to your credit score because applying for refinancing results in a hard inquiry of your credit. As long as you only have one or two hard inquiries on your credit profile (which stay for two years), the impact on your score is minimal. And as long as you continue making payments according to the new terms of the refinance and eventually pay off your loan, the long-term benefits will outweigh the short-term drawbacks.

Although student loans can be a good thing for your credit, it’s easy to get into trouble. If you aren’t careful with payments or take on too much debt, your credit score can suffer.

One measure of the amount of debt you owe is debt-to-income ratio, which is the percentage of your monthly gross income that goes toward debt repayment. The more you have to repay each month, the higher your DTI. Although DTI isn’t used in calculating your credit score, lenders use it in making decisions on loans. And required student loan payments can drive up your DTI.

Kantrowitz notes that federal student loans allow borrowers to enroll in income-driven repayment plans if their payments are too high. “This bases the monthly payment on the borrower’s income, as opposed to the amount they owe. This can significantly reduce the debt-to-income ratio, increasing the borrower’s eligibility for mortgages and other types of consumer credit,” says Kantrowitz.

It’s important to avoid missing student loan payments. Since payment history makes up 35% of your credit score, missing and late payments can have a significantly negative impact. 

The severity of a missed payment will depend on how late it is and how often you tend to miss payments. The later it is, the more detrimental its impact. Even so, if you have a 780 score and had never missed a payment before, just one payment that’s 30 days late could drop your score by 90 to 110 points. “Setting up automatic payments or exploring alternatives like deferment or income-driven plans can help avoid this,” says Robert Farrington, founder and CEO at The College Investor.

Private student loans require a credit check to qualify, and a co-signer is sometimes needed if the borrower doesn’t have good credit or hasn’t established a score yet. Co-signers assume responsibility for paying back the debt if the original borrower can’t. So if you take out a private student loan with the help of a co-signer, it’s important to understand the implications for their credit as well.

While managing your student loan responsibly won’t have any impact on your co-signer’s credit, missing payments can be detrimental. In addition to harming your own credit score, Kantrowitz warns that missing payments will also negatively affect the credit of any co-signers on your loans.

If you really let your student loan payments slip, you could end up in default. This is a much worse situation for your credit.

For most federal student loans, you are considered to be in default if you are at least 270 days behind on payment. At that point, your entire loan balance becomes due in full for federal student loans. Private student loans typically fall into default when you’re at least 90 days late on your payment. When you’re in default, you’ll likely face collection activity and may be sued to collect the debt. A default stays on your credit report for up to seven years from the date of first delinquency.

There is good news for federal student loan borrowers, however. There is an option for removing the default from your credit history.

“If the borrower defaults on the federal student loan, they have a one-time opportunity to rehabilitate the debt. This will remove the default from their credit history,” says Kantrowitz. To rehabilitate a defaulted student loan, you must work out a revised payment with your loan servicer and make nine payments within 10 months.

However, allowing your loan to reach default status can harm your credit even if you do loan rehabilitation. Even with the default status removed from your credit history, loan rehabilitation does not remove the record of late payments leading up to the default.

Preventing student loan default is imperative to protecting your credit and overall finances. So if you’re in danger of missing payments, it’s important to find a solution right away. Here are some options:

These options won’t directly improve or hurt your credit score, but they can help you maintain a current status on your loans, which benefits your credit in the long run. The main risk to your credit comes from mismanaging these processes. So be sure you understand all the terms and maintain communication with your loan servicer so you don’t miss any important steps or deadlines.

Now that you understand how student loans can affect your credit, make sure you follow these guidelines to ensure your student loan debt only helps – not hurts.