October 1, 2019

Do Student Loans Affect Credit?

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Student loans will affect your credit score. But that's not always a bad thing. Read on to learn the positive and negative ways that student loans can impact your credit.

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What Kind of Debt Are Student Loans?

Student loans are considered installment loans like mortgages and car loans. They are taken out for a specific amount and then repaid over a set period of time.

An installment loan can improve your FICO score if you demonstrate consistent, on-time payments for a long period of time. These loans are only reported to the credit bureaus based on whether payments are being made.

But student loans can also negatively impact credit. Failure to make timely payments (delinquency) or failure to make payments at all (default) will lower your credit card.

These loans may also hinder your ability to open new lines of credit based on your debt-to-income ratio (more on this below.

The other type of debt is revolving loans. These are open-ended lines of credit like credit card accounts.

A revolving loan can negatively impact your credit score if you:

  • Make late payments
  • Use a large percentage of your credit limit
  • Open new accounts too frequently

How Student Loans Are Reported

Student loans remain as open accounts on your credit report until they are paid off. On-time payments will be recorded by the credit bureaus.

But late or non-payment (delinquencies and defaults) are reported differently for federal or private student loans.

  • Federal Student Loans
    Delinquencies can be reported to credit agencies 90 days after a late payment.

  • Private Student Loans
    The lender can report a delinquency to credit bureaus after 30 days of a late payment.

With both types of loans, delinquencies and defaults will stay on your credit for 7 years—and sometimes even longer. We'll cover this a little later.

If you're in default with federal loans, a one-time rehabilitation option is available that will remove negative remarks and bring your loan current.

Delinquencies can also be removed when you take advantage of income-based or employment-based repayment plans.

How Do Student Loans Affect Credit During the Application Process

Applying for almost any new line of credit—installment or revolving—will add a hard inquiry to your credit report.

Student loan debt is not treated the same as revolving credit, which weighs more heavily on your FICO score. In other words, adding $25,000 in credit card debt will hurt your credit score more than adding $25,000 in student loans.

What is a FICO score?
FICO is a credit score measured with software from Fair Isaac Corporation. This measurement uses a number range between 300 and 850. Lower scores indicate a higher credit risk.

Your credit score weighs differently whether you apply for federal aid or a private loan. Read on to learn the differences.

Federal Loans
Federal student loans are issued based on financial needs. They are easier to obtain than private student loans since, generally speaking, your credit score won't factor into your acceptance.

Keep in mind, however, that if your credit history reflects a 90-day delinquency or you filed for bankruptcy within 90 days of the application date, you may have difficulty getting approved for a federal student loan.

Credit score is a factor for Direct PLUS loans. The parent or graduate/professional student would need a good credit history to be approved.

Private Loans
Private student loans, such as those through a bank or credit union, are more difficult to obtain compared to federal student loans.

Credit score and credit history are taken into consideration by the private loan lender. If your FICO score is below 650 points, you may have difficulty borrowing private student loans.

How Student Loans Affect Credit While in School

Your existing student loans will appear on your credit report even if you are not in repayment. They can negatively affect your debt-to-income ratio until you start to make money through work.

Debt-to-income ratio is a calculation based on gross income. If your gross monthly income is $5,000, and your monthly debt obligations are $1,500, your debt-to-income ratio is 30%.

Most lenders generally prefer a debt ratio below 30%. A higher ratio can hurt your chances of borrowing more money while you are in school.

How Do Student Loans Affect Credit During Repayment

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Once you enter the repayment phase, your student loans can help or hurt your credit. Keep reading to learn how each situation will affect your credit.

Paying as Agreed

Paying a loan as agreed means making at least the minimum payment on time each month. Student loan payments are reported to the three credit bureaus, so making on-time payments will improve your payment history.

Why is this important? Payment history accounts for about 35% of the score. And since student loans generally have a repayment period of several years, your payments can build a strong history over time.

Paying Late

Late payments, or delinquencies, on federal or private student loans will have a negative impact on your credit score. Your payment history, which is 35% of your score, will take a hit until the delinquency drops off the report.

Typically, these "bad" marks last 7 years. In the case of federal Perkins loans, delinquencies can stay on your credit report until the loan has been paid in full, even if it is longer than 7 years.

The impact on your credit decreases as the delinquencies age. However, the more you have on your report, the worse the impact.

  • Federal student loans are usually not reported to credit agencies until they are at least 90 days delinquent.

  • Private student loan delinquencies are reported when payments are 30–45 days late.

If you are struggling to repay your loans, you do have options:
  1. Check out discharge and loan forgiveness. If approved, this could either eliminate or lower your overall principal balance.

  2. See if you are eligible for an income-driven repayment plan. If not, refinance may be a good option for you.

  3. Determine if you are eligible for a deferment or forbearance—either of which will temporarily remove you from your monthly payment obligation.

Failure to make timely payments on your loans can send them into delinquency, which will negatively affect your credit for years.

Defaulting on Student Loans

A non-payment, or default, occurs when your loan is sent to a collection agency. Defaults for all federal and private student loans stay on your credit report for 7 years.

This is particularly bad for your credit score because it shows lenders that they cannot trust you with a loan. You'll have a harder time being approved for new credit in the future.

When a lender sells your account to a collection agency, they make significantly less than what they would make if you repaid as agreed. So lenders see defaulted loans as a loss in revenue—that's why it has such a harsh impact on your credit.

You should seek out every possible alternative before failing to make a student loan payment. But, if this does happen, there are some things you should know.

How Loans Are Collected if You Don't Pay
Your loan balance and interest may immediately become due in full. If you don't make your payments and enter default status, you could:

  • Have difficulty obtaining any type of credit because of your poor credit report

  • Be sued by your lender

  • Be forced to pay court costs, attorney fees, and other legal costs associated with non-payment of your loans and attempts to collect

  • Forfeit your tax refund—it may be used to pay your loan payments

  • Have your wages garnished (your employer may be required to withhold a portion of your paycheck to make payments towards your loans)

  • Be denied your transcripts, which are considered property of the school

  • Lose the option of refinancing your student debt

  • Get denied for forbearance or deferment

Can You Get Jail Time?
A student loan is considered a civil debt, like a credit card and hospital bill. You cannot be arrested for not paying civil debts or student loans.

You can be arrested if you are sued by your lender and do not show up after receiving a summons to appear in court.


A deferment will postpone repayment of your federal student loans for 6–12 months at a time. You have a total of 36 months throughout your loan repayment period for deferments.

In a deferment of a subsidized student loan, the federal government pays the interest that accrues during that period. You are responsible for the interest accruing on unsubsidized loans.

Deferments do not hurt your credit score unless you have a variable interest rate or if interest continues to accrue on unsubsidized loans.

In these cases, interest due during the deferment may be added to your principal balance when the deferment ends. This will increase the total amount you owe over the life of the loan, which can lower your credit score due to the debt-to-income ratio.

Loan Discharge

A loan discharge can improve your credit score. Here's how:

  • Delinquencies are Eliminated
    The lender or servicer will retract any delinquencies reported on the loans from your credit report when the account is closed out during a discharge.

  • Improve Your Debt-to-Income Ratio
    Lowering your debt helps you obtain additional credit in the future.

You may be able to get a loan discharged in the event of:

  • The student's death
  • False certification from the school
  • School closing
  • Disability
  • Bankruptcy

Loan Forgiveness

Most loan forgiveness programs pay for a portion of student loan debt. Loan forgiveness is an option in certain circumstances and for people in certain professions, such as doctors, nurses, and military.

Loan forgiveness can improve your credit score by lowering the amount due on your student loans. That will improve your debt-to-income ratio.

In programs, you will still have a balance due, and your credit report will reflect positively when you make payments on time.

Loan Refinance

Having your loans refinanced can have both a positive and a negative impact on your credit score. Refinancing your student loans can shorten your term and make your payments more affordable.

This can make your payments easier to manage. Making on-time payments and paying off the debt as agreed will improve your credit score.

However, in order to refinance your student loans, you'll need to apply for new line of credit. That will negatively impact your credit score for up to two years.

To avoid having multiple hard inquiries on your credit report, check rates from several lenders within 14 days. This way, it will only count as one credit inquiry.

Refinancing your student loans to a private loan eliminates your options for federal loan repayment options. This includes forbearance, forgiveness, deferment, and income-driven repayment plans.

Even if you have a higher interest rate, it may be worth keeping the loans as-is if you may need to utilize those options in the future.


A forbearance postpones repayment of your federal student loans for twelve months at a time. Your credit score may improve when you are removed from repayment.

But forbearances can also lower your credit score in the long term since interest continues to accrue during this period. It is then capitalized or added to your principal balance when the forbearance ends.

That means you will owe more money over the life of the loan, which can increase your repayment terms or monthly payment amount.

Improve Your Credit Score During Repayment

© CreditDonkey

Making your student loan payments on time is the best way to boost your credit score. But that's not all you can do. Keep reading to learn some other steps to take.

Check Your Credit Report

By law, you are entitled to one free copy of your credit report within a 12-month time frame from each of the nationwide credit companies. These reports contain:

  • Current (and some past) debts

  • Account histories

  • Credit Inquiries

  • Public records, such as liens

Credit reporting mistakes and student loan servicing errors can happen. Here are some errors to watch for:

  • Misapplied payment to wrong student loan account

  • Didn't cover outstanding delinquency prior to deferment or forbearance

  • Loan listed in default status in error

  • Student loans listed twice on report

  • Student loans reported that do not belong to you

  • Payment reported falsely as late

If you think there's an error, you can follow these steps to correct it:

  1. Verify federal student loan records against government records on the National Student Loan Data System (NSLDS). Note: Credit information on the NSLDS site may take up to 120 days.

  2. Contact your lender or servicer regarding the error. Your lender or servicer will correct it in their recordkeeping system and ensure your credit report is also corrected.

  3. Dispute the error with the credit reporting company. This is only if your lender or servicer acknowledges the error but refuses to correct it. The credit reporting company will lead you through a series of steps, including the filing of a complaint.

To obtain your free credit report from each agency (Equifax, Experian, TransUnion), visit AnnualCreditReport.com.

Prioritizing Your Student Loan Payoff

If you are set on paying off your loans early, follow these tips:

Target loans with the highest interest rates
You may be tempted to pay off the loans with the smallest balance first. But paying down the loans with the highest interest first will ultimately save you the most money in the long run.

Try this strategy: Pay as much as you can on the loan with the highest interest rate and the minimums on the others.

Once that first loan is paid off, roll over the payment amount to the next loan with the second highest interest. Continue this process until all of the loans are paid off completely.

Some lenders charge an early payoff penalty when student loans are paid off in advance. Why? Lenders make money through interest charged on loans. The sooner you pay off the loan, the less money the lender makes on your debt.

Paying off a loan early can also reflect poorly on your credit record since you won't be able to build up a consistent history of on-time payments.

That doesn't mean you should keep your loans (or pay the extra interest) longer than necessary. Just be sure to know the lenders terms before making extra payments.

Make sure payments are applied correctly
Pay attention to how your lender allocates your extra payment. Instead of applying extra amounts to the principal, your lender may credit it towards your next bill. That won't do much to reduce your interest or make a dent in the balance.

Always ask your lender to avoid "Paid Ahead" status to ensure that your progress isn't slowed down.

Take advantage of a 0% credit card offer
When refinancing your private loans isn't an option, you can shift some of the balance to a zero-interest credit card.

Credit card companies routinely use 0% promotional offers to attract new customers. Taking advantage of this can give you a break from higher interest rates.

Before you sign the dotted line on the credit card offer, make sure you have a plan in place to pay off the balance before the promotional period ends. Otherwise, you will be stuck with an interest rate that's even higher than that of student loans.

Consider a move
Relocating to a cheaper city can make managing your payments easier. Some places even offer additional incentives to entice new grads.

Parts of Kansas and Detroit, for example, offer programs that provide loan reimbursement for borrowers who are willing to pick up their roots and try out a new city.

Bottom Line

Student loans can improve your credit score if you stay on track with your payments. But late or missed payments can hurt your credit.

Avoid delinquency at all costs. If you find yourself short on cash, seek alternative payment options right away. And be sure to check your credit report for any errors regarding your student loans.

Write to Mary Humphrey at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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