Do Student Loans Affect Your Credit Score?

People who graduate college likely don’t have much to report in terms of credit. However, student loan payments can be a great way to establish good credit early. There may be some uncertainty about how your credit score can be impacted by student loan payments.  Understanding how the two are connected can better equip you to manage your credit. 

By Timothy Mably

As you begin to establish your career and life after graduating college, you may have questions concerning how student loans affect your credit score. Since student loan debt is far more prevalent than regular credit card debt, it’s important to know how it can impact you. To plan for the future, you will need to learn how payments are recorded.

Student loans are referred to as “installment loans,” which means they are paid over time with designated amounts. They’re similar to mortgages as they give borrowers a specified installment to return monthly. 

How Do Student Loans Affect Credit Score?

Student loans work like any traditional loan and have the capacity to greatly affect your credit score in either a positive or negative direction. Paying off your student loans will impact you whether they are on time or late. Although considered debt, it will not affect your credit score if you pay increments on time. 

The Consumer Financial Protection Bureau website states that there are some ways that student loans differ from regular loans. The site says, “Each time you receive loan funds, it appears on your credit report as a new account. Your payments will be recorded this way too, even if you’re making a single payment to one servicer."

A credit score will drop when the lender reports that a payment isn’t on schedule. Federal student loan services wait around a minimum of 90 days and private student loan lenders will report a minimum of 30 days. If you’re late and it is considered “delinquent” or “default,” meaning it has been over 270 days, your credit score will drop. 

Credit scores are made up of a person’s payment history, the amounts owed, length of credit history, new credit, and a credit mix. Student loans can strengthen a person’s credit mix, which is the product of various types of debt such as credit cards, car loans, or student loans. If you make payments on time, you’ll set yourself up for strong credit down the line.

Using Student Loans For A Good Credit Score

LinkedIn Learning author and chief advocacy officer of MX.com, Jane Barratt, says that just like any loan, paying on time is the most efficient strategy for a good credit score. She says, “If you’re applying for a different loan, you may want to prioritize the loan with the highest interest. Typically, student loans have a lower interest rate and you may want to pay a loan with a higher interest rate to improve your debt-to-income ratio and reduce the amount of interest you’re paying over the loan period.”

However, she clarifies that she isn’t advocating not to pay, saying, “Think of how you can accelerate paying down highest interest while still paying lower interest loans.”

The amount that is owed will account for 30% of a person’s credit score. After you pay off a student loan, the loan is taken off your credit history. Barratt explains, “The loan servicer sends the update to the three credit bureaus, which will help the debt-to-income ratio when you apply for a new loan.”

Since the amount of your student loan and payment history will go on your credit report, making payments on time will allow you to maintain an impressive score. However, failing to make payments will harm your credit score. Barratt says, “Establishing a good credit history and credit score now can help you get credit at lower interest rates in the future. If you think you may not be able to make your payments, contact your servicer to find out more options.”

After applying for a loan and a credit check is conducted by the lender, there will be a “hard inquiry” also known as a “hard pull” filed on your credit report. This can cause your score to drop slightly. 

According to CNBC, negative account information can remain on a person’s file for seven years. Since payment history makes up for 35% of credit score, this can be integral.

After paying off your student loans, your score is likely to drop if it was the only installment loan. It isn’t recommended to prioritize credit mix over paying loans.

What To Do If You Can’t Make Payments

If you’re unable to make payments, there are a variety of ways you can still pursue a good credit score. Above everything else, you should maintain communication with your servicer to explain the situation you are in.

It’s possible that you qualify for student loan forbearance, which includes three types: administrative, general, and mandatory. Administrative forbearance is relevant for borrowers who apply to federal programs or have benefits. General forbearance is intended for borrowers who have a certain level of financial trouble. Mandatory forbearance is meant for more exclusive circumstances of financial burdens or people who are entering the medical field.

Student loan forbearance will shield you from delinquency, default, or collections. It also won’t have any impact on your credit score.

By setting up a direct debit for 0.25% of your interest rate, implementing extra payments, remaining in close contact with your servicer, and keeping records, you can set yourself up for success. There isn’t a more important time to achieve good credit, as one late payment has the potential to negatively orient you financially into the future.

Top Takeaways

Do you know how student loans affect your credit score? 

• Student loans are referred to as “installment loans,” which means they are paid over time with designated amounts.
• Although considered debt, it will not affect your credit score if you pay increments on time.
• Federal student loan services wait around a minimum of 90 days and private student loan lenders will report a minimum of 30 days. If you’re late and it is considered “delinquent” or “default,” meaning it has been over 270 days, your credit score will drop.
• After you pay off a student loan, the loan is taken off your credit history.
• If you can't make student loan payments, consider forbearance to keep you from delinquency, default, or collections.