If you’ve borrowed money to pay for college, you probably have tons of questions. How quickly do you have to pay it back? What’s your interest rate? And do student loans affect your credit score?
The answers, in order: It varies; it varies; and yes, they do. But just how student loans affect your credit score is partly up to you.
How credit scores are calculated
Under the FICO credit-scoring model, your credit score is calculated based on five primary factors. Each weighs into your score differently.
Your payment history makes up about 35% of your credit score. While on-time payments nudge your score up gradually, a single late or missed payment can tank your score for months.
Your outstanding debt, worth about 30% of your credit score, compares how much you owe compared to your available credit. Lenders often assume people with larger outstanding debts are riskier borrowers.
The age of your credit matters, too, accounting for about 15% of your overall score. Applying for new credit lowers your credit’s average age, which may slightly dent your score.
Lenders like to see a diverse mix of credit accounts — like credit cards and student loans — to show you can responsibly handle debt. Your credit mix makes up about 10% of your credit score.
New credit inquiries comprise about 10% of your score. While you occasionally need to apply for credit, applying for too much, too quickly makes lenders nervous and can lower your score.
How student loans affect your credit score
Student loans can help credit or hurt it. Just like any other debt, the key is staying on top of your payments and managing additional debts responsibly.
By staying on top of your finances, your student loans can help build credit over time.
- Payment history. Making student loan payments on time, every time establishes a strong payment history and builds credit.
- Credit history. As your loan ages, so will your average credit age. Sure, it takes time, but because student loans take 10 to 30 years to repay, that time adds up.
- Credit mix. Student loans diversify your credit mix, boosting your score as you handle multiple debts.
- New credit. Federal loans don’t require a credit check, reducing potential credit inquiries. In other words, you can enjoy the benefits of a loan without the drawbacks of applying.
The student loan on your credit report also can generate negative impacts. Here’s how:
- Payment history. If your payment is late by 30 days, your loan servicer may report you to the bureaus, resulting in a lower score. Some student loan servicers offer a 90-day grace period, though late fees may apply.
- Outstanding debts. Taking on too much student loan debt, or throwing credit card debt on top, can lower your overall score.
- Credit history. Student loans hit your credit report after receiving funds, which may temporarily lower your score each semester.
- New credit. Federal loans don’t generate hard inquiries, but private student loans and refinancing applications do.
Does student loan forbearance affect your credit score?
Student loan forbearance is an agreement between a lender and borrower to temporarily pause loan repayments. This gives you time to catch up financially. However, that interest still accumulates on your balance in the meantime.
If your servicer approves a forbearance period, it won’t impact your score. But if you just stop making payments suddenly or miss a payment when forbearance ends, your score will tank.
Does student loan forgiveness affect your credit score?
Whether student loan forgiveness impacts your credit score depends on if you receive full or partial forgiveness.
Take the Biden administration’s plan to forgive up to $10,000 or $20,000 in student loan debt for most borrowers. An estimated 43 million people will see at least some forgiveness.
For the 20 million borrowers who qualify for total forgiveness, the loan will disappear from their credit report. That may result in a slight credit score dip as the loan is “paid off” and average account ages decrease.
Meanwhile, students who receive only partial forgiveness may not see any impact, as a balance (and future payments) will remain.
What to do if you can’t pay your student loans
If you’re struggling to repay your student loans, you’re not alone, and you do have options.
Sign up for an income-driven repayment plan
Income-driven repayment plans base your monthly payment on your income and family size. Federal borrowers can choose from among four plans if they qualify. President Joe Biden’s student loan forgiveness plan also proposes additional aid for income-driven borrowers by:
- Cutting payments in half
- Raising exempted income limits
- Covering borrowers’ monthly interest payments
Apply for a modified payment plan
Modified payment plans change the terms of your student loan by adjusting your payment amount, interest rate or timeline. Private lenders may grant modified payment plans based on financial need or other factors.
Enroll in deferment or forbearance
If you struggle to make payments, your loan servicer may also offer a deferment or forbearance plan to give you some breathing room. These plans let you temporarily reduce or skip payments. Deferred payments accrue no interest, while forbearance plans do.
How does that student loan affect your credit score? It varies
Student loans affect your credit score but how, and how much, varies. The best way to keep your score high in the meantime is by making on-time payments and only taking out credit you absolutely need.
Will refinancing student loans affect my credit?
Yes, refinancing student loans can affect your credit score. You can reduce this impact by submitting all your applications within 14 days to consolidate them into a single hard inquiry.
What happens when student loans go into default?
When you default on a student loan, the servicer may write off the loan and send it to the government or a collections agency, depending on whether the loan is federal or private. The default will appear on your credit report, and the new debt holder will likely try to collect payment.
Does paying off student loans help your credit score?
Paying off your student loans may result in a small dip in your score as you remove the account from your credit report. Assuming you’re otherwise financially healthy, your score will recover quickly.