Do Student Loans Affect My Credit Score?

Student loans generally make it possible for most people to pay for tuition, housing, books, and everything else it takes to earn a degree. And while they work like other loans—showing up on your credit reports and affecting your score depending on how you manage them—they carry a special weight because they represent years of hard work and big goals.

When graduation day comes, the excitement of moving forward often comes with the reality of repayment. Paying back what you borrowed, plus interest, isn’t always easy. If you’re carrying student debt (or considering borrowing), it’s completely normal to feel the weight of it. You don’t have to figure it out on your own—there are strategies and options to help you manage repayment and hopefully avoid the need for debt relief while you move toward financial freedom.

If you have student debt (or you're thinking of borrowing to pay for school), there's a lot to consider, including: 

• How do student loans affect credit score calculations?

• How will student loans impact your finances once you graduate?

Freedom Debt Relief isn't a Credit Repair Organization and doesn't provide, or offer, services or advice to repair, modify, or improve your credit. 

How Do Credit Scores Work?

Your credit score is a number that's meant to summarize your ability to repay a loan based on your borrowing history and how well you manage debts. There are two main credit scoring models lenders use to evaluate loan candidates: FICO and VantageScore.

Your FICO Score is based on data from these categories:

• Payment history: 35%

• Amounts owed/credit utilization: 30%

• Length of credit history: 15%

• Credit mix: 10%

• New credit: 10%

VantageScore has different versions, with 4.0 the most widely used. Your VantageScore 4.0 is based on data from these categories:

• Payment history: 41%

• Age and type of credit: 20%

• Credit utilization: 20%

• Balances: 6%

• New credit: 11%

• Available credit: 2%

The category of amounts owed/credit utilization refers to revolving credit accounts, rather than installment loans. In a revolving credit account, your line of credit replenishes as you pay down your balance. Credit cards are a great example.

With an installment loan you borrow a set amount that you repay over time with fixed payments. Examples include student loans, personal loans, and mortgage loans. 

On-time installment loan payments could help your credit score improve. Also, credit utilization only looks at revolving credit. Installment loans don’t factor into your credit utilization/amounts owed.

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How Student Loans Could Help Your Credit

Student loans could be a good thing for your credit for a few reasons.

Payment history

Your payment history carries the most weight of the various factors that go into your credit score. On-time student loan payments could help you build a good credit history.

Let’s imagine you have a student loan payment you’re required to make every month over 10 years until your debt is paid off. Making each payment on time strengthens your credit profile and shows that you can repay your debt in a consistent manner. Other lenders may be more eager to loan you money if you have a years-long history of making your monthly student loan payments on time. 

Your lender or loan servicer might also offer an incentive to pay on time with a rate discount. Many federal and private student loan lenders offer a 0.25% rate discount when you enroll in automatic payments. 

That's a win-win. Not only would you get a lower interest rate on your loans, but setting up automatic payments means you’re far less likely to be late making payments. Timely payments could help your credit score improve, and avoiding late payments by automating can do the same. 

Credit mix

Part of your credit score is based on your credit mix, or the types of credit accounts you're using. 

When you have both revolving and installment debt, lenders can see that you have experience handling a variety of credit types. 

Lenders typically like you to have installment loans in your credit mix because they're considered less risky. Installment loans, by nature, have fixed, predictable monthly payments, whereas with a revolving line of credit, you can keep borrowing until you're maxed out.

Also, installment loans are designed to get paid down over time. The more payments you make, the lower your balance gets. 

With a revolving line of credit, you could pay your balance in full every month, but that may not mean you're closer to getting out of debt, since you could just borrow more. So having student loans on your credit profile strengthens it overall.

Account age

Student loan debt could help improve your credit history age, another credit score factor. 

Lenders want consistency with payments, and they also like when you have a history of repaying debt. Student loans are commonly paid off over many years, which means they’ll stay on your credit report for many years. Making on-time payments establishes a strong credit history, which could cause your credit score to rise. 

Student Loan Credit Inquiries and Initial Impact

You may end up having some different types of inquiry on your credit report: hard and soft.

Typically, when you apply to borrow money, whether in the form of a credit card or installment loan, a lender does a hard inquiry on your credit report to assess if you're a good candidate. A soft inquiry, on the other hand, is generally used for things like prequalification, and it's only visible to you—not other lenders. A soft inquiry also won’t affect your credit score. 

A hard inquiry typically lowers your credit score by a few points. Having the occasional hard inquiry is generally not a problem. Try to avoid too many hard inquiries within a short period of time. 

Generally speaking, federal student loans don’t require a hard inquiry on your credit report. The exceptions are Direct PLUS loans, which are available to graduate students and parents of undergraduate students.

Private student loans, on the other hand, commonly require a hard inquiry on your credit report, so having too many could drag down your credit score.

If you're borrowing privately, shop around for different lenders for the best rates. Generally though, a few hard inquiries of the same nature within the same few weeks are treated as a single inquiry.

In other words, if you apply for student loans with four different private lenders within two weeks, that will usually be treated as a single hard inquiry. In that case, your credit score might only drop by a few points. If you spread out those private loan applications over many weeks, each one could be treated as a separate hard inquiry, causing a larger drop in your credit score.

How Student Loans Could Hurt Your Credit 

Student loans are an installment debt. You borrow a set amount and then pay that money back with interest in monthly installments. Over time, the balance should eventually go down to zero. Once the balance is paid off, the loan account is closed. 

Student loans could affect credit scores negatively when they’re paid late. And the way late payments are reported depend on the type of loan:

• Federal loans. Loans become delinquent the first day after a payment is missed. If you're delinquent for 90 days or more, your loan servicer will report your account to the three major credit bureaus.

• Private loans. Private student loan lenders typically report late payments to the credit bureaus after 30 days. You have much less leeway to be late with private loan payments from a credit score perspective. 

Allowing a student loan to go into default can be even more damaging. Most federal student loans go into default if you haven’t made a payment in more than 270 days. 

Federal student loan default

If you have federal student loans and they go into default, you could face some consequences. In that situation, your entire unpaid balance technically becomes due immediately. If you don't pay, your employer could be instructed to garnish your wages.

This doesn't mean you'll lose your entire paycheck. Your employer might have to withhold a substantial portion of your pay for loan payment purposes.

Also, if you default on your federal student loans, federal benefits you're eligible for, like Social Security, could be garnished. The same applies to your tax refund.

Another thing to know is that once you default on your student loans, you lose protections like deferment or forbearance, both of which let you pause your payments for a period of time. You also give up the right to choose a different repayment plan. Also, you generally can’t apply for new federal aid if you're in default.

If you've defaulted on your federal student loans, there’s still hope. You can look at several options to get out of default, including loan rehabilitation or consolidation. 

With loan rehabilitation, you repay your loans in nine payments over the course of 10 consecutive months. You can contact your lender to start the rehabilitation process. 

Another possibility is to consolidate your loans into a single loan. To consolidate a federal loan in default, you either agree to repay your new loan under an income-based repayment plan, or you make three consecutive, on-time monthly payments in full before consolidating your balances. 

Private student loan default

There’s no single benchmark for defaulting on private loans, since each lender sets its own terms. Many private loans go into default if you haven’t made a payment in more than 120 days.

If you default on private student loans, your lender might sue you for the unpaid balance. If they win their case, you could end up with a judgment on your credit report. The lender could also seize your bank account or garnish your wages to force you to pay.

Defaulting on federal loans typically doesn't result in a lawsuit, but your tax refunds could be withheld and your wages could be garnished. Also, your default will typically be reported to the credit bureaus. That could result in a lower credit score, making it harder to get approved for other loans or lines of credit if you want to get a credit card, buy a car, or apply for a mortgage.  

Student Loans and Your Debt-to-Income Ratio

Student loans affect your debt-to-income ratio, or DTI—the percentage of your income that goes toward monthly debt repayment.

DTI doesn’t directly affect your credit score, but it’s a big factor in lending decisions. Lenders look at DTI ratios to ensure that you're not overburdened financially. A lower DTI means you might have room in your budget for a new loan payment. A higher DTI means most of your money is already spoken for.

The debt-to-income ratio could be a factor if you're hoping to get a mortgage to buy a home. Generally, lenders look for a DTI of 43% or less for mortgage approvals. If you have a significant amount of student loan debt, that could make it harder to get approved for a home loan. 

Do Deferred Student Loans Show on Your Credit Report?

Payments on your student loans may be deferred while you're in school. They may also be delayed for a certain number of months after you graduate. Federal student loans, for example, have a six-month grace period after graduation when no payment is due. 

You could also defer federal student loans if you’re experiencing financial hardship and need temporary debt relief. The Department of Education can put federal student loans into forbearance temporarily if you can't pay. Private student loans generally don't offer these benefits, though some lenders may allow you to defer or pause loan payments under certain circumstances. 

Missing payments on student loans is different from not paying them because they're deferred. Student loans can still appear on your credit reports when they are deferred. Having student loans in deferment on your credit reports shouldn’t negatively impact your credit score.

If you apply for a new loan while your student loan payments are paused, the lender may include the potential payment in your debt-to-income ratio. That’s because they want to make sure that you can afford the new account as well as your future student loan payments.

Once your student loans come out of deferment, you're required to start making payments as scheduled. At that point, missing a payment or paying late could hurt your credit score. 

If your federal student loans go into forbearance, it shouldn't have a negative impact on your credit score as long as you meet eligibility requirements and follow your payment schedule.

What if You Can’t Pay Your Student Loan? 

If you can't make payments on your student loans, your next move depends on your loan type. With federal loans, you have three options for student loan debt relief:

• Apply for deferment

• Put loans into forbearance

• Request an income-driven repayment plan

Deferment is available for borrowers experiencing specific situations, such as financial hardship, illness, or active military service. You can also defer loans while you're enrolled in school at least half-time. 

Forbearance may allow you to pause loan payments temporarily if you're struggling to make payments due to financial difficulties, medical expenses, a change to your employment situation, or another reason acceptable to your loan servicer. You can apply for forbearance if you're serving in AmeriCorps, completing a medical or dental internship or residency, have been activated for National Guard Duty, or have student loan payments that exceed 20% of your monthly gross income.

The difference between deferment and forbearance has to do with interest. During deferment, you may or may not accrue interest on your loans, depending on the type of loan you have. The interest keeps accumulating on loans in forbearance, so you could end up owing more money once the forbearance period is up.

An income-driven repayment plan could help you continue paying on your loans, with payments tailored to your income. You could choose from different income-driven repayment plans, and apply online through the Department of Education website.

If you have private student loans you’re struggling to repay, whether you can get any student loan debt forgiveness will depend on your lender. Private lenders aren't required to offer deferment, forbearance, or income-driven repayment plans, but your lender may be willing to work with you. If not, you may need to consider refinancing your student debt into a new loan to get a lower monthly payment. 

Talking to your loan servicer or lender could help you avoid defaulting on federal or private student loans. The lender or loan servicer can suggest solutions for dealing with your loans so that you don't run the risk of falling behind on payments and damaging your credit score. 

Student Loan Refinancing and Credit Impact

If you're having trouble repaying your student loans, you may be thinking of refinancing. In some cases, refinancing student loans could make your monthly payments more affordable. That could help you avoid being late, which could help you avoid damage to your credit score.

It's possible to refinance federal student loans, but this is generally not recommended for a couple of reasons. First, federal student loans typically have competitive interest rates to begin with. You may not get a better interest rate by refinancing.

Federal student loans come with protections that private loans don't have, like income-based repayment plans, forbearance, and deferment. If you refinance federal student loans into private ones, you give up these benefits.

If you have private student loans with a high interest rate, you may be able to qualify for a lower interest rate that reduces your monthly payments and makes them more manageable. When you apply to refinance a loan, including a student loan, the lender does a hard inquiry on your credit, which could cause a small dip in your credit score.

When you refinance student loans, you swap an old loan for a new one. The old loan is paid off and therefore comes off of your credit report, and the newer loan gets added to it. This could cause a drop in your credit score because you're shortening the average age of your credit accounts.

Falling behind on private student loans payments could cause a lot more credit score damage than a hard inquiry for a refinance or a shortened age of your loans. If refinancing into a new private loan with better terms makes your payments easier to cover, then it may be worth doing, and it might ultimately help your credit score much more than it hurts it.

Lower student loan payments could make it easier to manage your bills and various debts overall, which could lead to a higher credit score in time.

Student Loans vs. Other Debt Types for Credit Building

Paying debts on time is a great way to boost your payment history and help your credit score improve.

The point isn’t to borrow money if you don’t need to just to increase your credit score. But repaying student loans is a good way to build credit, since these loans (especially federal loans) may come with competitive interest rates and predictable monthly payments.

Paying off a credit card balance in full every month could also help your credit score improve. But your monthly credit card balances aren't set in stone. Your student loan payments are fixed, making them more predictable and potentially easier to manage.

If you don't have the longest credit history, it could make sense to make some student loan payments before applying for new loans. Applying as a more established borrower could boost your approval chances and help you get a more competitive rate. If you've recently begun repaying your student loans, you may want to hold off on additional borrowing until you've been making loan payments for six months or more. 

How Much Do Student Loans Impact Your Credit Score?

Your overall credit profile plays a part in how much student loans impact your credit score, using factors like: 

• Current credit score

• Existing accounts

• Payment history

If your only debt is your student loan balance and you make those payments on time each month, that could have a huge impact on your credit score: a positive one. A few missed payments could have a negative impact.

The higher your credit score is to begin with, the more damage a single late student loan payment could cause. 

People with low credit scores have a history of missed payments and are already viewed as high risk, so another late payment isn't as damaging. If you have a very high credit score, it's often because you're on time with all of your payments. Missing one payment could be viewed as uncharacteristic and have a greater impact. However, your high credit score and clean history could allow you to maintain a relatively good score even with a missed payment. 

If you're struggling to keep up with your student loan payments,try to avoid reaching the point where you're late in paying. If that happens, reach out to your loan servicer to find out what options you might have.