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 2023 graduate was an estimated $37,650.

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 scores.

Key Takeaways

  • Student loans can positively impact your credit scores by helping you build a strong payment history and being classified as “good debt,” indicating financial responsibility and potential income growth.
  • Missing payments on student loans or having high debt levels can negatively affect your credit scores, leading to long-term impacts on your financial health and borrowing ability.
  • Refinancing student loans and managing them through deferment, forbearance, or income-driven repayment plans can help maintain or improve your credit scores, but it’s essential to understand the potential consequences and benefits of each option.

How Student Loans Can Affect Your Credit Score Positively

Contrary to popular belief, being in debt is not always a negative mark on your credit history. When managed properly, student loans can, in fact, positively influence your credit score.

Your Payment History

One of the major factors contributing to your FICO credit score – roughly 35% – is your payment history. Timely and consistent payments on all debts, including your student loan payments, help to build a positive payment history. This consistency, maintained over time, can improve your credit score. When future lenders review your credit file, they’ll notice this solid payment history, indicating your reliability as a borrower.

Classification of Student Loans as Good Debt

Student loans, both federal and private, are frequently classified as “good debt” in credit score calculations. These installment loans are seen to add value to your financial profile and potential net worth, similar to how a mortgage is perceived. The value of a mortgage is often backed by an appreciating asset – the house – which can be sold to clear the remaining mortgage balance, hopefully leaving some equity.

Similarly, student loans indicate to potential lenders your employability and prospective income growth. This indication is based on statistics showing that college graduates, on average, earn significantly more per week than individuals with just a high school diploma.

However, all debts are not created equal. Certain “bad debts”, such as credit card debt or an auto loan, are viewed less favorably because the assets tied to these debts typically depreciate over time. This depreciation is why student loans aren’t weighed as heavily when calculating your credit scores.

How Student Loans Can Affect Your Credit Score Negatively

While student loans are generally classified as “good debt”, this classification doesn’t always translate into personal financial wellbeing. The negative consequences associated with student loans usually arise when payments aren’t managed effectively.

Effect of Missed Payments and High Debt Levels

Late or Missed Payments

Failure to make timely payments on your student loans, also known as delinquency, can lead to a quick drop in your credit scores. This drop is particularly significant as your payment history makes up 35% of your FICO credit score calculation. Missed payments stay on your credit report for up to seven years, which means they can have a long-term impact on your credit health.

High Debt Levels

Another factor that lenders consider when assessing your creditworthiness is your debt-to-income ratio, which measures the amount of your monthly gross income that goes towards debt payments. If you have high monthly debt payments relative to your gross income, it could hinder your chances of loan approval and negatively affect your credit scores.

Your credit scores also take a hit when your overall debt levels are high, even if the debt is classified as “good.” Therefore, it’s important to manage your student debt holistically, ensuring that it doesn’t corner you when seeking future loans. Managing these elements of your financial profile can help protect and even improve your credit scores over time.

How Refinancing Student Loans Can Affect Your Credit Score

Refinancing student loans is a strategy many borrowers resort to in their quest to manage and eventually overcome student debt. When successful, it can lead to more manageable student loan payments and, possibly, a quicker route to loan payoff. But what does refinancing mean for your credit score? Let’s break it down.

The Pros and Cons of Refinancing

One of the main advantages of refinancing is the potential to secure a lower interest rate. This could be especially beneficial if your credit score has improved since you initially took out your student loans, as a higher credit score can often lead to more favorable loan terms. A lower interest rate could ultimately reduce the amount you pay over the life of your loan, making your debt more manageable.

On the other hand, refinancing federal student loans into a private student loan means you will lose access to federal benefits, such as income-driven repayment plans and loan forgiveness programs. This could be a significant disadvantage, especially if you have a low or unstable income.

The Impact of Hard Credit Checks

When you apply to refinance your student loans, most lenders will perform a hard credit check. This shows up on your credit report and can temporarily lower your credit score by a few points. However, if you shop around for private student loans within a short period (typically a few weeks), credit scoring models will often count these inquiries as a single event, reducing the overall impact on your credit score.

The Effect of a Lower Interest Rate

Refinancing to a lower interest rate could positively impact your credit score in the long term. This is because it can decrease your monthly payments, making them more manageable and increasing the likelihood that you’ll make them on time. As we’ve established earlier, timely payments are the most significant factor in maintaining a good credit score.

Moreover, by lowering your total debt through refinancing, your credit utilization ratio (a significant factor in credit score calculations) could also improve. Lower credit utilization generally leads to a higher credit score.

How Student Loan Deferment Can Impact Your Credit Score

Federal student loan borrowers have the option to defer loan payments temporarily under specific circumstances. However, these deferrals can have mixed effects on your credit score.

The Role of Interest During Deferment

The type of your federal student loan determines whether the government covers interest during the deferment period. Federal Perkins Loans, Direct Subsidized Loans, or Subsidized Federal Stafford Loans are eligible for this interest subsidy. However, unsubsidized loans or PLUS Loans aren’t eligible, meaning your loan will continue to accrue interest during deferment.

Interpretation of Deferment by Lenders

Deferment can be interpreted differently by lenders. Some might deny a personal loan application because they see a growing, deferred student loan. Others might disregard the deferred loan from your debt-to-income ratio because you’re not required to make payments, which could improve your chances of securing a loan.

The Consequences of Defaulting on 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.

Ready to Raise Your Credit Score?

Learn how credit repair professionals can assist you in disputing inaccuracies on your credit report.

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.

Tips for Improving Your Credit Score Amid Student Loan Debt

Despite the challenges, several strategies can help you manage your student loan debt effectively and protect your credit score:

  • Goodwill adjustment: If you have late payments on your credit history, consider writing a goodwill letter to your loan servicer, explaining why the payment was late and requesting removal of the late payment record. This strategy is especially effective if you can demonstrate extenuating circumstances and have otherwise been a good customer.
  • Disputing errors: Occasionally, errors occur on credit reports, such as a loan being listed multiple times. Regularly checking your credit report enables you to catch and dispute these errors with credit bureaus promptly.
  • Consistent payments: On-time monthly payments are critical to maintain and improve your credit score. Consider setting up automatic payments to ensure you never miss a deadline.
  • Refinancing: If your interest rate is high, consider refinancing your student loans. This process can potentially lower your monthly payments, making them more manageable.
  • Income-driven repayment plan: If you have federal student loans, consider enrolling in an income-driven repayment plan. This plan tailors your student loan payments to your income, making them more manageable.

Bottom Line

As a college student or a recent graduate, understanding how student loans impact your credit scores is key to securing your financial future. Remember, knowledge is half the battle – stay informed, make on-time payments, and manage your student debt proactively to safeguard your credit scores and enhance your financial prospects.

Frequently Asked Questions

Can paying off my student loans early hurt my credit score?

Paying off student loans early can initially lower your credit score slightly due to the reduction of your credit mix (diversity of loan types). However, in the long run, reducing your overall debt is generally beneficial for your financial health.

How does student loan deferment or forbearance impact my credit?

Approved deferment or forbearance doesn’t negatively impact your credit score directly, as it’s considered an agreed-upon arrangement with your lender. However, the status of your loans may be updated on your credit reports, and this can affect lenders’ decisions, as it indicates you may be experiencing financial difficulty.

Does consolidating my student loans affect my credit score?

Consolidating your student loans can temporarily lower your credit score due to the hard credit check that is part of the application process. However, over the long term, if consolidation helps you manage your payments better and lower your debt, it could positively affect your credit score.

Do student loans have a statute of limitations?

Most private student loans have a statute of limitations, which varies depending on the contract and state law. Federal student loans, on the other hand, do not have a statute of limitations, and the government can take actions to collect the debt indefinitely.

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.