Many college students, graduates and parents (or grandparents) of students have taken out student loans to help pay for educational expenses. These loans are generally reported to the three national consumer credit reporting agencies — Equifax, Experian and TransUnion — and could impact the borrower’s credit score.
Building credit can be important for your financial and personal life. A high score can make qualifying for new loans or credit cards easier, may save you money with lower interest rates or insurance premiums and could even help you rent an apartment or home.
Because so many people have student loans — and for many new college students, the loans may be the first time they use credit — understanding how student loans can affect your credit is important.
So, how exactly do student loans affect your credit score?
Student loans can hurt or help your credit score
As with other types of installment loans, such as a personal loan or auto loan, your student debt can help or hurt your credit score depending on how you manage your loans and your overall credit profile.
But student loans have a few features, such as deferment or forbearance, that may not be as common with other types of installment loans. Understanding these features, how they work and the impact they could have on your credit can help you manage your student loans with confidence.
If you want to see where you stand with your credit, you may be able to check your credit reports and scores for free through a variety of financial institutions and online tools. For example, LendingTree, the parent company of MagnifyMoney, gives you free access to your TransUnion VantageScore 3.0.
How student loans can hurt your credit
Opening new accounts can lower your score
Whether you take out a student loan or something else, a new credit account can lead to a dip in your credit score for several reasons.
For one thing, the new account could decrease the average age of accounts on your credit reports — a higher average age is generally better for your score. Additionally, if you applied for a private student loan, the application could lead to the lender reviewing your credit history. A record of this, known as a “hard inquiry” or “hard credit check,” remains on your report and may hurt your score a little.
Your student loans will also increase your current debt load. While the amount you owe on installment loans may not be as important as outstanding credit card debt, it could still negatively impact your score.
Credit scores aside, lenders may consider your debt-to-income ratio when you apply for a new credit account. Having a large amount of student loan debt could make it more difficult to qualify for a loan or credit line later, even if you have a good credit score.
You might wind up opening many student loan accounts
Often, students who take out student loans will have their new loan or part of the loan disbursed near the start of each term. Each disbursement could count as its own loan on your credit reports. So even if you only send one payment to your servicer every month, the servicer allocates the payments among each individual loan.
Each of these student loans could impact your age of accounts and overall debt balance. Also, if you’re repeatedly applying for private student loans, each application could lead to a hard inquiry.
You might fall behind on your payments
Your payment history is one of the most important factors in determining a credit score. Being 30 or more days past due could lead to a negative mark on your credit reports that can hurt your credit score.
And even before the 30-day point, your loan servicer may charge you a late fee if you don’t pay your bill by the due date, although some servicers give borrowers a grace period, often for 15 days.
If you’re repaying multiple student loans, missing a single payment to your loan servicer could lead to a late payment on each of your student loan accounts. Falling further behind could lead to a larger negative impact on your score, as your loan servicer reports your payments 60-, 90-, 120-, 150- and then 180-days past due.
Unless you bring your accounts current, they could be sent to collections, which could be indicated on your credit reports and hurt your score more.
Getting too far behind on student loan payments could also end up putting you in default, and you’ll immediately owe the entire outstanding balance rather than being able to use a repayment plan. The lender may also be able to sue you to take money directly from your paycheck or, in some cases, your tax return or bank account.
Federal Direct and Federal Family Education Loans go into default after 270 days of nonpayment. Other student loans may default sooner.
It can be more difficult to pay other bills
Even if you can stay on track with your student loans, having to make the monthly payment could cause trouble keeping up with other bills.
Missing a credit card, auto loan or mortgage payment could hurt your credit, as could rolling over a large amount of credit card debt, even if you’re consistently making minimum payments on time.
How student loans can help your credit
Student loans can establish credit
A student loan may be some borrowers’ first foray into the world of credit, and it could help them establish a credit history.
Credit-scoring models require a minimum amount of data to generate a score, and having a student loan on your credit reports could help make you scorable rather than “credit invisible.”
A student loan can diversify your credit mix
Showing that you can manage different types of accounts, such as installment loans and revolving accounts (credit cards, lines of credit, etc.), could help your credit score.
If the only debt you’ve had is a credit card, adding an installment loan in the form of a student loan can increase your mix of accounts and help your score. Likewise, if your only credit account is a student loan, opening a credit card might help your score.
Making on-time payments can help your score
Since your credit history is one of the most important credit-scoring factors, try to always make on-time payments as you repay your student loans. Doing so could help you build a solid credit history, which can lead to a higher score.
If you’re having trouble affording your student loan payments, consider your options (discussed below), and look for a way to lower or temporarily stop your payments before you miss one.
The loans can help build a lengthy credit history
Although it’s not one of the most important credit-scoring factors, the length of your credit history and the average age of your accounts can impact your credit score.
If you take out a student loan during your first term at school, you may wind up with years’ worth of credit history before graduating.
Continuing to take out new student loans each term could lower your average age of accounts. But your average age of accounts will still increase as you repay your loans.
One common point of confusion is whether closed accounts can still impact your credit history.
For example, if you take out a student loan as a freshman, then defer the payments for four years and repay the loan using the 10-year standard repayment plan, the account will be closed once it’s repaid.
But the account will still stay on your credit reports for up to 10 years from when it was closed, and it could impact your credit history and average age of accounts during that period.
Protecting your credit while repaying student loans
Once you take out student loans, you may be able to defer making full (or any) payments until after you leave school. But once you start repaying the loans, a misstep could lower your credit score. Here are a few ways you could keep your student loans from hurting your credit.
Don’t miss your first payment
Many student loans offer an in-school deferment period, which lets you put off loan payments until six months after you leave school. In-school deferment lets you focus on your schoolwork and makes student loans affordable, as many students might not have enough income to afford monthly payments.
But don’t forget about your loans and miss your first payment. Doing so could hurt your credit score.
To avoid missing the first — and subsequent — payments, you may want to enroll in an auto payment program with your student loan servicer. Many lenders and loan servicers will even offer you an interest rate discount as long as you’re enrolled in autopay.
Compare repayment plans
You may be able to choose from several federal student loan repayment options. The main options include the standard, extended, graduated and income-driven plans.
Choosing an extended, graduated or income-driven plan, rather than the standard plan, could lower your monthly payments.
If you choose an income-driven plan, be sure to renew your repayment plan every year and send your loan servicer updated documentation to remain eligible.
Although the nonstandard plans could wind up costing you more in interest overall, the lower payments could make managing all your bills easier, which can be important for maintaining and building credit.
Contact your lender if you’re struggling to afford your payments
If you do find yourself struggling to make payments, be sure to reach out to your loan servicer. With federal student loans, you may be able to switch repayment plans, or temporarily place your loans into deferment or forbearance to stop making payments.
Private student loans aren’t eligible for the federal repayment plans, but private student loan lenders may offer similar deferment or forbearance options. Some may also have other hardship options, such as temporarily reduced payment amounts or interest rates.
Your credit score won’t be affected by placing your loans into deferment, forbearance or using a hardship option, as long as you make at least the required monthly payment on time. But interest may still accrue on your loans if you’re not making payments, and the accumulated interest could be added to your loan principal once you resume your full monthly payments.
Learn about federal student loan default rehabilitation
If one or more of your federal student loans has gone into default, there are two ways that you could potentially “rehabilitate” the loan and get back on a repayment plan:
- You could consolidation the loans with a federal Direct Consolidation Loan. The Department of Education will issue you a new loan and use the money to pay off your existing loans. If you include your defaulted loan, that loan will be paid off, and your new consolidation loan will be current. To be eligible, you must agree to either repay the consolidation loan with an income-driven repayment plan or to make three monthly payments on your defaulted loan before applying for consolidation.
- Alternatively, you could contact your loan servicer and agree to make nine monthly payments within 10 consecutive months. The servicer will determine your monthly payment amount, which should be “reasonable and affordable” based on your discretionary income. Once you complete the payments, your loan will be taken out of default.
If you use the second method — and this if the first time you rehabilitated the student loan — the default associated with the loan will also be removed from your credit reports. Although the late payments associated with the loan will remain for up to seven years from the date of your first late payment, having the default removed could help your score.
With the first method, the default won’t be removed.
Private student loan companies may also offer you a way to rehabilitate a private student loan that’s in default. If you use the program, you may be able to request the removal of the default from your credit reports by contacting the lender, but the late payments on the account could remain.
Can shopping for student loans impact your credit?
Comparing student loan lenders and loan types won’t impact your credit score unless you submit an application for a private student loan. When you submit a private student loan application, the resulting hard inquiry could have a minor negative impact on your score.
Shopping for a private student loan, comparing the pros and cons of different lenders, and submitting multiple applications so you can accept the loan with the best terms is generally a good idea. Hard inquiries usually only have a small impact on credit scores, and scores often return to their pre-inquiry level within a few months, as long as no new negative information winds up on your credit reports.
While multiple hard inquiries can increase score drops, particularly for those who are new to credit, credit-scoring agencies recognize the importance of rate shopping. As a result, multiple inquiries for student loans that occur with a 14- to 45-day window (depending on the type of credit score) only count as a single inquiry when your score is being calculated.
Can refinancing student loans help or hurt your credit?
If you already have a good-to-excellent credit score and a low debt-to-income ratio, you may want to consider refinancing your student loans. When you refinance your loans, you take out a new credit-based private student loan and use the money to pay off some or all of your current loans. (The lender will generally send the money directly to your loan servicers.)
Refinancing can save you money if you qualify for a lower interest rate than your loans currently have, and combining multiple loans into one could make managing your debt easier.
When it comes to credit scores, refinancing student loans is a bit like taking out a new loan. You’ll need to apply for the loan, which could lead to a hard inquiry. Shopping around and submitting applications during a short period could help you get the best rate while limiting the negative impact of the inquiries.
After getting approved for refinancing, the new loan may be reported to the credit bureaus, which could lower your average age of accounts. Your other loans will be paid off, but they could stay on your credit reports for up to 10 more years. Your overall installment-loan debt will stay the same, and as long as you continue to make on-time payments, your score may improve over time.
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