If you’re wondering, “Do student loans affect your credit score?” you’re likely feeling the financial effects of taking out a loan or anticipating them. It’s an important question to answer because your financial future could hang in the balance, even if you’ve managed to earn the degree you were after.
If not properly managed, your credit score could fluctuate dramatically, leading to potential challenges in the future.
Luckily, this doesn’t have to be your fate. Here’s everything you need to know about how your student loan affects your credit score.
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How credit scores are calculated
Under the FICO credit-scoring model, your credit score is calculated based on five primary factors, each carrying a different weight:
Payment history
This makes up about 35% of your credit score. On-time payments gradually boost your score, while a single late or missed payment can significantly impact it.
Outstanding debt
Worth about 30% of your credit score, this factor compares how much you owe compared to your available credit. Lenders often view individuals with larger outstanding debts as riskier borrowers.
Credit history
Accounting for about 15% of your overall score, the age of your credit matters. Applying for new credit can slightly lower your score by reducing your credit’s average age.
Credit mix
Lenders want to see a diverse mix of credit accounts, such as credit cards and student loans, to demonstrate responsible debt management. Your credit mix makes up about 10% of your credit score.
New credit
New credit inquiries comprise about 10% of your score. While you occasionally need to apply for credit, applying too much quickly makes lenders nervous and can lower your score.
How student loans affect your credit score
Student loans can help or hurt credit, just like any other debt. The key is staying on top of your payments and managing additional debts responsibly.
Positive impacts
Student loans can help build credit over time by staying on top of your finances.
- 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.
Negative impacts
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 appear on your credit report after you receive 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.
MoneyLion offers a free and convenient way to find offers from our trusted partners to help you improve your credit — such as credit monitoring, credit report disputes, and getting credit by paying bills. A good credit score can lead to lower interest rates and increased borrowing power on loans and credit cards.
Does student loan forbearance affect your credit score?
Student loan forbearance is an agreement between a lender and borrower to pause loan repayments. This gives you time to catch up financially. However, the interest still accumulates on your balance in the meantime.
If your servicer approves a forbearance period, it won’t impact your score. But your score will tank if you suddenly stop making payments or miss a payment when the forbearance ends.
Does student loan forgiveness affect your credit score?
Whether student loan forgiveness impacts your credit score depends on you receiving full or partial forgiveness.
Take the Biden administration’s plan to forgive up to $10,000 or $20,000 in federal student loan debt for most borrowers. More than 30 million people are expected to 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 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:
- Requiring payment of no more than 5% of discretionary income
- Raising exempted income limits
- Forgiving loan balances of $12,000 or less after 10 years instead of 12
- 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 provider may 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.
Stay on Top of Your Student Loan
Like any debt you incur, a student loan can impact your credit score positively or negatively. However, if you stick to your repayment plan, make every payment on time, seek help as soon as needed, and, above all, pay it off, your student loan can be a net good.
FAQ
Will refinancing student loans affect my credit?
The hard inquiry will ding your credit score. Also, a new loan without a proven payment history could affect your credit.
What happens when student loans go into default?
Your previous terms are no longer valid, your balance becomes due immediately, you lose eligibility for deferment or forbearance, and the default is reported to credit bureaus. Moreover, your lender may take action against you, including garnishing your wages.
How long do student loans stay on your credit reports?
Your student loan may remain on your credit report for up to seven years after you pay it off or it goes into default.
Does paying off student loans help your credit score?
Paying off your student loan shows lenders that you held up your end of the deal. It also lowers your debt, improving your credit score. Nonetheless, you may see a temporary dip in your score.
