College is a time of life when many young people leave their homes and head off to school in hopes of getting an education. For many, this means getting a student loan, as tuition costs have risen dramatically over the past few decades.
Whether it’s tuition, living expenses, or books, higher education costs are often very high. In turn, many individuals end up borrowing money from the federal government or private lenders in the form of student loans to continue their education.
To beginning answering the question “do student loans affect credit score?”, let’s break it down. First, what is a student loan?
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What is a student loan?
They’re installment loans that require a set monthly payment until the loan is paid in full. This amount may fluctuate, depending on the payment plan you’re on. And each time you remit payment, the activity is reported to the 3 credit bureaus. Student loans are used by students to cover educational costs including tuition, books, and living expenses.
There are two types of student loans: federal and private. Federal loans are provided by the government through Sallie Mae, the largest private student loan lender in the country, while private loans are given out by banks and other financial institutions
Do student loans hurt your credit score?
Student loan deferments and deferrals are reported to credit bureaus as derogatory items, known as delinquencies. In other words, your credit report loan in deferment or deferral will report negatively to creditors and banks. The average student loan borrower has 3.59 delinquencies, which can stay on your credit report for up to seven years!
The negative impact on a borrower’s credit score is significant — it can decrease by more than 30 points during the first year of delinquency! As such, it is preferable to take action sooner rather than later. However, failing to make a payment for an extended period without working out an arrangement with the loan services puts your credit rating at risk.
Federal student loan servicers will give you 90 days to bring the account current before the delinquency is reported. Private student loan servicers aren’t as generous, though – you can expect them to report delinquency to the credit bureaus once the account reaches 30 days past due.
Also, know that the longer the loan remains delinquent, the more severe the impact on your credit report, as the servicer will continue to report the status every 30 days.
Do you need good credit to get a student loan?
Not necessarily. There’s no credit check requirement for federal student loans for undergraduates. Grad PLUS loans for graduate students and parents do require a credit check, but having less than perfect credit doesn’t mean your application will automatically be denied. You don’t have to worry about an excessive interest rate either – rates are the same for all Grad PLUS loan recipients for the year.
Whether you’re an undergraduate or graduate student, private loan servicers will typically require a credit check. If approved, your interest rate will be determined by your creditworthiness. And if your application is denied, you can reapply with a co-signer who has excellent credit to strengthen your approval odds. Keep in mind that they will also be responsible for the loan until it’s paid in full.
Will your credit score improve if you refinance your student loans?
Refinancing your student loans may make them easier to manage. But is it a good move for your credit score? If you’ve struggled to keep up with multiple monthly payments, it may be a good idea to reduce your risk of credit damage and go ahead and make one single payment.
Be aware that refinancing federal student loans into a private product may come with drawbacks. For example, you may lose certain benefits like repayment flexibility. Also, you will need to shop around for the best lender, which can ding your credit score if make too many applications.
The good news is you can apply with as many lenders as you want in a 14-day window, but one hard inquiry will be reflected on your credit report. This is referred to as rate-shopping, which is allowed under the FICO model.
What if you can’t pay your student loans?
Reach out to your student loan servicer promptly at the first sign of financial distress. You may qualify for a payment arrangement that allows you to minimize damage to your credit score until you get back on track.
The federal government offers income-based repayment plans that make payments more affordable for student loan borrowers. You can also apply for a deferment or forbearance to be relieved from payments for an extended period.
Private student loan servicers don’t offer income-based repayment plans, but you may qualify for a deferment or forbearance. Some also allow you to change your due date or reduce your loan payment for a few months. It’s best to call the loan servicer to explore your options.
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Can you build credit with student loans?
As mentioned earlier, timely student loan payments help improve your payment history over time. But maybe you’ve had quite a few missteps and are seeking ways to restore your credit health.
If you are trying to build your credit to qualify for better rates or loan products, consider a Credit Builder Loan from MoneyLion. Our loans are the ideal option for those college-bound students needing to improve their credit scores and borrow. Plus, you can get approved for a low-interest loan of up to $1,000! There are no hard credit checks, and it only takes a few minutes to apply for consideration.
To qualify, you must meet the following requirements:
- Bank account that’s at least 60 days old and in good standing
- Reliable source of income with bank statements to prove
- Unemployed income qualifications can include government benefits, child support, or alimony
Here’s how to get started:
- Download the MoneyLion mobile app.
- Create your custom profile and connect your bank account.
- Submit a formal application and get an answer in minutes.
- Accept your loan offer.
Monthly payments are automatically deducted from your account, so you won’t have to worry about late payment penalties and fees. Payment activity is reported to the 3 credit bureaus – Equifax, Experian, and TransUnion – to help boost your score over time.
You can view the payment history on your student loans for free by downloading your credit reports from AnnualCreditReport.com. Keep tabs on your credit score and any changes to your accounts through MoneyLion’s Credit Score Tracking feature, part of the Credit Builder Plus membership.
Preparing for the future
In order to properly prepare for financial hiccups, you must have a plan in place. That’s why MoneyLion created our Safety Net feature, your one-stop shop for all your financial solutions. From college tuition to new tires, our safety net feature gives you peace of mind by having all your available funds visible in one easy-to-use app. Download the MoneyLion app today and take on the future with confidence!