How Do Student Loans Affect Credit Score?

Couple with student debt
BY Rebecca Lake
Aug 1, 2022
Key Takeaways:
  • Student loans affect your credit report and how much you qualify to borrow.
  • Paying a student loan on time can improve your score as you build good repayment history.
  • Too much debt or missing student loan payments lowers your credit score.

Student loans can make dealing with college costs easier. You can use student loans to pay tuition, fees, room and board and other necessary expenses to earn a degree. Once you graduate, you'll need to pay back what you borrow with interest. As of 2022, Americans collectively owe $1.7 trillion in federal and private student loans. 

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?

  • Does paying student loans build credit? 

Like other types of loans, student loans can appear on your credit reports. Whether student loans impact your credit scores positively or negatively can depend on how you manage them. 

How Student Loans Can Hurt Your Credit

Student loans are a type of installment debt. As with any other installment loan, you borrow a set amount. You 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. 

To understand how student loans can hurt your credit, it helps to understand what factors go into credit score calculations. FICO scores, the most commonly used credit scoring model, are based on five factors:

  • Payment history - 35% of your score

  • Credit utilization - 30% of your score

  • Credit age - 15% of your score

  • Credit mix - 10% of your score

  • Credit inquiries - 10% of your score

Student loans don't affect credit utilization because they are installment loans. Credit utilization means how much of your credit limit you're using at any given time. That figure is calculated using revolving debts (i.e., credit cards) instead. 

Having student loans can, however, affect your score negatively if you pay late. How late payments are reported can 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 may report late payments to the credit bureaus after 30 days. 

Allowing a student loan to go into default can be even more damaging. If you default on private student loans, for instance, the 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, though your tax refunds can be seized and unpaid loans can be reported to the credit bureaus. Negative items, including late payments, defaults and judgments, can linger on your credit reports for up to seven years. That could make it harder for you 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. 

How Student Loans Can Help Your Credit

Having student loan debt can be a good thing for your credit if you make your payments on time. Part of your FICO credit score is based on your credit mix or the types of credit you're using. Having both revolving and installment debt can show lenders that you're responsible when using a variety of credit types.

More importantly, student loans can help you to establish a positive payment history. Again, payment history is the most important element of the FICO credit score calculation. As long as you're making payments on time each month according to the schedule set by your lender or loan servicer, you can build a good credit history. 

In fact, your lender or loan servicer might offer an incentive to get you to pay on time in the form of a rate discount. For example, you might qualify for a 0.25% rate discount when you enroll in automatic payments. That's a win-win since you can get a lower rate and avoid paying late simultaneously. 

Student loan debt can also help to improve your credit age, which accounts for 15% of your FICO score. Lenders like to see borrowers with several years of experience using credit under their belts. The longer you pay on your loans, the more your credit history ages, and that’s a good thing. 

Student Loans and Your Debt-to-Income Ratio

Student loans don't affect your credit utilization ratio, but they can affect your debt-to-income ratio or DTI. Your debt-to-income ratio is the percentage of your income that goes toward monthly debt repayment. 

DTI does not impact your credit score, but it’s a big factor in lending decisions. Lenders look at DTI ratios in credit decisions to ensure that you're not overburdened financially. If half of your income is going to paying off existing debts, for example, lenders might see you as much more risky if you're trying to take out new loans or lines of credit. 

The debt-to-income ratio can be critical 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 can also take deferments due to financial hardship if you have federal loans. The Department of Education can also put loans into forbearance temporarily if you can't pay. Private student loans generally don't offer those benefits, however.

Student loans can still appear on your credit reports when they are deferred. However, having student loans in deferment on your credit reports isn't bad. There's a difference between missing payments on student loans and not paying them because they're deferred. Lenders may include the potential payment in your debt-to-income ratio when evaluating you for a loan to make sure that you can afford the new account plus your future student loan payment.

Once the loans come out of deferment, you'd need to begin making payments as scheduled. At that point, missing a payment or paying late could hurt your credit scores. The same applies if your loans are in forbearance. 

What if You Can’t Pay Your Student Loan?

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

  • Apply for a deferment

  • Put loans in forbearance

  • Request an income-driven repayment plan

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

Forbearance allows you to pause loan payments temporarily if you're struggling to make payments for any reason. You can also apply for forbearance if you're serving in AmeriCorps, are completing a medical or dental internship or residency, have been activated for National Guard Duty or your student loan debt exceeds 20% of your monthly gross income.

The difference between deferment and forbearance has to do with interest. During deferments, no interest accrues on your loans. The interest keeps accumulating on loans in forbearance. So you could end up owing more money overall once the forbearance period is up.

Income-driven repayment can help you continue paying on your loans, with payments tailored to your income. There are four income-driven plans to choose from; the one you qualify for is based on your income and household size. You can apply for income-driven repayment online through the Department of Education website.

If you have private student loans and can't pay, then your options depend on the lender. Private lenders aren't required to offer deferment, forbearance or income-driven repayment plans. So if you can't pay, you might need to consider refinancing your student debt into a new loan to get a lower monthly payment. 

Talking to your loan servicer or lender can 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. 

Frequently Asked Questions

How do student loans affect credit score calculations?

Student loans can affect your payment history. If you pay late or default, those negative items can land on your credit reports. Payment history accounts for the largest share of your score calculator. So missing payments on student loans can be damaging to your credit scores.

Does paying student loans build credit history?

Paying student loans can help your credit if you're paying on time. Positive payment history carries the most weight with credit scores. Setting up automatic payments to your student loans can help you avoid paying late. Your lender might discount your rate when you enroll in autopay.

What happens if I never pay my student loans?

If you fail to pay student loans, the debts can become delinquent. Delinquencies can show up on your credit reports and harm your credit scores. Defaulting on federal loans can result in liens or an offset of your tax refund. Private student loan lenders can sue you for unpaid debt. It is possible, although very difficult, to discharge student loans in bankruptcy.