Do Student Loans Affect Your Credit Score?


For many Americans, it’s difficult to escape college without accumulating some degree of student loan debt. In fact, the average debt for a Class of 2021 graduate was an estimated $36,900.

graduation cap on dollar bills

Your student loan payment affects how much money you have leftover from your paycheck each month. It also has a big impact on your credit.

This is important because your credit report and credit score have a significant impact on your future financial stability. For example, your credit scores influence what kind of credit cards you’ll be approved for. They also determine what your interest rate will be on other loans and mortgages.

By understanding your student loans and how to manage them successfully, you’ll set yourself up for a bright future and strong credit. Below we’ll explain the positives and negatives of how student loans affect your credit score.

How Student Loans Affect Your Credit Score Positively

Owing debt might automatically seem like a bad thing on your credit history. But, while it certainly can be detrimental to your credit score in some ways, it can be helpful in others.

Your payment history’s timeliness and consistency on all debts account for 35% of your credit score. It’s the most critical factor contributing to that magical number. So, every time you make a payment on time, you’re contributing to a positive history that helps improve your credit score over time.

As long as you can make your student loan payment each month, you can rest easy knowing that you’re building a solid credit history and score. Plus, when future lenders look at your credit, they’ll note that strong payment history. It indicates you’re likely to pay back any new loans as well.

Good Debt

Another way student loans help your credit score is that it’s considered “good debt” in your score calculation. Good debt includes installment loans that are likely to add value to your finances and net worth.

A mortgage, for example, is backed by an asset (the house) that ideally grows in value over time. So, when you sell the house, hopefully you’ll be able to pay off the remaining mortgage balance and have some equity leftover.

Similarly, student loans indicate to lenders that you are more employable and have the potential for income growth. After all, the average college graduate earns over $450 more each week than someone with just a high school diploma.

Bad Debt

So-called “bad debt” includes revolving credit such as credit card debt because whatever you purchase on your credit card loses value over time. You’ll never get more money selling it than you paid for it.

The same holds true for car loans since the value of any vehicle depreciates so quickly. Consequently, your student loans aren’t weighted as heavily when your credit score is calculated.

How Student Loans Affect Your Credit Score Negatively

Just because student loans are considered “good debt” in general, that doesn’t necessarily mean it is good for you specifically. Here’s why. Remember that 35% of your credit score depends on paying your bills on time.

Your credit score will drop quickly if you are unable to pay your student loans. So keep a padded savings account to make your student loan payments on time, regardless of what happens in other areas of your life.

Debt-to-Income Ratio

While student debt is viewed as “adding value” to your income potential, it still counts as debt. So if you’re applying for a mortgage or personal loan, the lender will review your debt-to-income ratio.

If you owe too much each month compared to your gross income, you probably won’t get approved for a loan. Plus, the second-highest category in your credit score is “amounts owed”. This is how much debt you carry.

Your credit score also takes a ding when you have high levels of debt, even if it is “good debt.” Look at your debt levels holistically to make sure you’re not working yourself into a corner when it comes to future borrowing.

How Deferring Your Student Loan Impacts Credit Score

Graduates with federal student loans have the option to defer their payments under certain circumstances temporarily. For example, you might be eligible if you lose your job, undergo economic hardship, or enroll in another college or graduate program.

If you truly cannot make your monthly payments, but expect to be back on your feet in the near future, a student loan deferment might be a suitable option for you. However, make sure you understand all the repercussions before you decide.

Subsidized Loans

First, it’s essential to know what type of federal student loan you have. The government will pay for your interest during the deferment period if you have a Federal Perkins Loan, a Direct Subsidized Loan, or a Subsidized Federal Stafford Loan.

Unsubsidized or PLUS Loans

Any unsubsidized loan or PLUS loan does not qualify for this benefit. That means your loan will continue to accrue interest while it’s deferred. You can either pay that interest alone during the deferment period, or you can add it to the principal amount once you start making payments again.

So, if your interest payments aren’t subsidized, you’ll either accrue more debt during the deferment period, or you’ll still be paying interest without actually lowering your loan principal. When you apply for a personal loan or mortgage during deferment, a lender can interpret your financial situation in one of two ways.

The first is that they see your student loan is deferred and deny the loan, especially if your loan is unsubsidized and the balance is growing.

Alternatively, the lender could remove your student loan payment from your debt-to-income ratio because you’re not required to make payments at the time. So in that scenario, it would actually help your chances.

You don’t need to make up your mind on deferment based on either of those situations alone. Just know that you have options. Shop around for lenders if you need to, and hopefully, you’ll find one who is willing to help.

The Effects of Defaulting on Your Federal Student Loans

Student loan deferment is always better than going into delinquency or default. A delinquency is reported to the three major credit bureaus after your payment is past 90 days due. The loan goes into default if your monthly payment is 270 days late.

Once the loan is in default, they will likely sell it to a collection agency. The collection agency can take legal action against you to recuperate the money owed. Plus, the negative item stays on your credit report for seven years. It can also lower your credit score by 100 points or more.

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In addition to hurting your credit score, defaulting on your student loan can have even more severe consequences depending on where you live.

Some states have passed laws to suspend your driver’s license in the event of student loan default. Other state laws suspend professional licenses, such as health care and cosmetology.

Those decisions don’t seem to help someone who has trouble paying student loans. But, unfortunately, they still exist in many places. Several state legislatures are working to repeal these laws. So, you need to thoroughly research your exact location to understand potential consequences relevant to you.

See also: What Happens If You Default On Your Student Loans?

Why Bankruptcy Is Not the Solution to Your Student Loan Problems

Sometimes people with overwhelming debt consider filing for bankruptcy if it looks like they won’t ever be able to repay what they owe. And while this has severe financial consequences, there are some extreme circumstances where this might be the best option available.

The problem with both Chapter 7 and Chapter 13 bankruptcy is that neither one allows for the dismissal of student loans. So, even if you successfully file for bankruptcy, you will still owe your student loans. They will not be discharged.

The only exception to this rule is if you can demonstrate undue hardship.

You’ll need to prove three things:

  • Poverty – that you won’t be able to afford basic living standards if you have to repay your student loan.
  • Persistence – that your financial situation probably won’t change for the rest of the student loan repayment period.
  • Good faith – that you have done your best in trying to repay your loans.

This exception is tough to achieve. So, don’t file for bankruptcy automatically assuming you’ll qualify to have your student loans discharged. It’s always wise to talk to a lawyer before taking any action.

How to Successfully Remove Late Student Loan Payments From Your Credit Report

Even if you have some student loan late payments on your credit report, it is possible to remove them so they won’t hurt your credit scores. You can do this by sending the lender a goodwill letter.

The basic premise is to explain why the payment was late and request that the item be removed from your credit history. You’re most likely to succeed if you can demonstrate extenuating circumstances and have otherwise been a good customer.

Disputing Student Loans

Student loans can be difficult to dispute successfully, especially if you have federal loans, but you can dispute them. One common mistake on the credit bureaus’ part is listing the same loan more than once. Even if your student loan is from the government, it’s serviced by a private student loan company.

These companies can sell your loan to another loan servicer at any time. In some instances, borrowers have reported multiple listings for the same loan on their credit reports; one for each loan servicer.

That’s why it’s essential to check your credit report at least once a year. You can easily file a dispute with the credit bureau and have little trouble getting them removed.

Federal and private student loans can both significantly impact your credit score if you don’t manage them well. However, knowledge is half the battle. So, focus on making those loan payments regularly to avoid any negative consequences that can come with student loan debt.

Lauren Ward
Meet the author

Lauren is a personal finance writer who strives to equip readers with the knowledge to achieve their financial objectives. She has over a decade of experience and a Bachelor's degree in Japanese from Georgetown University.