Student loans impact your credit score in several different ways, depending in part on how responsibly you repay them. Missing payments on your student debt can negatively impact your score, while consistently making on-time payments will help build your credit history. If you have at least one other debt vehicle, then taking out student loans will also affect your credit mix. Having a lengthy credit history and a diverse credit mix will, in turn, improve your credit score.
Key Takeaways
- Student loans can impact your credit score by contributing to your credit mix and length of credit history.
- Regular, on-time payments will have a positive effect on credit score.
- Missed payments on your student loans can lead to a lower credit score.
- Options like deferment, forbearance, and income-driven repayment (IDR) plans can offer temporary relief from student debt but may impact credit scores.
- Refinancing and consolidation may help you better manage your student loans.
Understanding Credit Scores
Your credit score is a three-digit number meant to give lenders and other financial services providers a quick way to see how you handle credit obligations.
Information about payments and the amounts you’ve borrowed are assigned values, and an advanced formula is used to calculate your score. The main factors for the FICO score, which is one of the most commonly used credit scores, include:
- Payment history: 35%
- Amount of available credit you’re using: 30%
- Number of years you’ve used credit: 15%
- The number of new accounts you’ve opened and inquiries you’ve made: 10%
- Types of credit in use, such as revolving and installment loans: 10%
Whether you pay on time and in full is one of the most important influencers of your credit score, so student loans can lower your credit score if you miss payments.
Impact of Student Loans on Credit Scores
When you first get a student loan, how it impacts your credit score partially depends on whether or not it requires a hard inquiry, which results in a small (but temporary) credit score decrease. Most federal loans don’t require a credit check, so a hard inquiry won’t be reported to the credit bureaus. Conversely, PLUS loans—for parents, not those for graduate or professional students—and private loans do require a hard inquiry.
Once you have your student loans, the main impact on your credit score will come from your payment history. If you pay late or miss payments, these can be reported to the major credit bureaus and subsequently listed on your credit report, lowering your score. On-time payments can also be reported to the credit bureaus, but this information will eventually increase your score. Plus, because student loans are installment loans, they can also positively impact your credit mix, especially if your only other credit accounts are revolving credit cards.
Whether student loan deferral or forbearance will impact your credit score depends on your loan type and whether you applied before you started missing payments.
Deferral vs. Forbearance
Federal loan deferral usually occurs in specific situations, such as returning to school or military deployment. You can put off making payments during the deferral period without penalty, although interest might still accrue on unsubsidized loans. Federal loan forbearance is usually a result of financial hardship and allows you to stop making payments for up to 12 months at a time, while interest still accrues regardless of your loan type.
In most cases, missed federal student loan payments won’t be reported unless you default, meaning you haven’t made payments for 270 days.
The situation with private student loans is different. If they offer a hardship program, you can usually avoid overly negative credit consequences by making payments “as agreed” while you’re in the program. However, missing a payment before you enter one of these programs can negatively impact your credit score.
If you’re struggling to make your student debt payments, contact your student loan servicer quickly to set up a plan and prevent your payment from being marked as late or missed.
Why Did My Credit Score Go Down After Paying Off My Student Loan?
Paying off your student loan can lower the average age of your credit score. Additionally, if you have a limited credit mix, paying off a student loan reduces the types of credit you have. This can result in a temporary dip in your score.
Can a Student Loan Impact a Co-Signer’s Credit?
If the borrower doesn’t make payments, it can show up on a co-signer’s credit report. Additionally, the amount borrowed is also reported on the co-signer’s credit history and can affect their debt-to-income (DTI) ratio.
How Does Student Loan Forgiveness Impact My Credit Scores?
You might see a dip in your credit score if your student debt is forgiven because your loans are paid off and no longer appear on your credit report, contributing to your credit mix and the length of your credit history.
The Bottom Line
Student loans can affect your credit score in various ways, and much of the impact depends on how you manage these loans. If you make at least the minimum payment on time each month, you can build a positive credit history and avoid the score-busting consequences of missed payments. Budget for student loan payments or, if you have federal loans, consider applying for an income-driven repayment (IDR) plan to ensure that your monthly payments are manageable.