How Do Student Loans Affect Your Credit Score?

Posted by in Credit Scores | Updated on May 30, 2023
At a Glance: The biggest negative effect on your credit score comes from missed payments. However, this effect is not instant. Your credit score only gets affected 1 or 3 months after you miss the payment for private and federal student loans respectively.

Student loans are a special type of loan and you may be unsure of how they influence your credit score. It is also important to understand what exactly a credit score is. If you want to learn more about what a credit score is and how a student loan affects your credit score, read on.

How Credit Scores are Determined

Credit reporting bureaus each have unique methods for using people’s information to create a credit score, which they then sell to lenders. 

The most well-known credit scoring model in the U.S. is the FICO score. The FICO credit score is a number between 300 and 850, where 300 is ‘bad’ credit and 850 is ‘excellent’ credit. This score takes various factors into account, including:

  • History: This factor has the greatest ability to affect your score. It refers to whether you tend to make debt payments on time. Missing a payment on your loans decreases your credit score.
  • Current debt: This refers to the current debt ‘burden’ you have. Lenders are more comfortable lending you money if you have well below the amount of debt you could have. This is because there is a lower chance that you could become overextended, and potentially start missing payments.
  • Length of history: Having credit lines open, or showing responsible use for a long time shows a consistent pattern that lenders trust to predict your future behavior. Keeping up payments on a long-term loan (e.g. mortgage) boosts your credit score.
  • New debt: If you have recently applied for a lot of new loans or lines of credit, lenders take this as an indicator that you are in financial distress, and are more reluctant to lend.
  • Types of debt: Having a diverse mix of types of debt that you handle responsibly (e.g., car loan, credit card, mortgage) can boost your credit score.

Once you understand a bit more about the FICO credit score, you are in a better position to understand how student loans affect credit scores.

How Student Loans Impact Your Credit Score

The question of how a student loan affects your credit score depends on what happens with your student loan while you are paying it off. The effects of some typical events are outlined below.

Missed and Late Payments

Missing a payment for your student loans has the potential to decrease your credit score. 

However, before this can happen, your lender has to tell the credit bureau that you have missed one or more payments. By law, there is a delay between when you miss the payment and when your lender is allowed to share that information with a credit bureau. 

For federal student loans, lenders must wait at least 90 days before reporting to a credit bureau. Private student loan lenders only have to wait 30 days. 

This reporting period gives you time to contact the lender and either make the payment or adjust your payment plan. However, even if you make the payment before the reporting period ends, the lender may still charge you late fees.

If the worst happens, and the information about your missed payment (also called delinquency) reaches the credit bureau, that information remains on your credit report for seven years. Increasing delinquency has an increasingly negative effect on your credit score.

What If You Cannot Afford Your Student Loans?

If you find yourself in a situation where you are unable to make the payments for your student loans, there is a risk of a decrease in your credit score.

However, there are options you can explore in this situation. If you have federal student loans, you can apply for an income-driven repayment plan. This type of plan adjusts the payment based on how much money you are earning at a given moment. 

If you have private student loans, you can contact your lender and apply for a modified payment plan. This could allow you to decrease the monthly payment in exchange for lengthening the repayment period. Alternatively, your lender may allow you to enroll in a deferment or forbearance program, in which you are allowed to temporarily pause your monthly payments. 

Different lenders have different options so contact your lender to find out what is possible. Changing the nature of your payment agreement with a lender does not affect your credit score.

Improving Your Credit Score with Student Loans

If you handle your student loan well and make all the payments on time, you can boost your credit score. 

It is important to note that the positive (and negative) effects of student loans affect the credit of the person who is signing the agreement. That means if someone else takes out a federal parent PLUS or private parent student loan to pay for you, it is their credit score, not yours that gets affected. 

On the other hand, if you are the one who is signing the loan agreement it is your credit score that gets the benefit of on-time payments. If someone else co-signs your student loan agreement, then both of your scores are affected by what happens to the loan.

Refinancing Student Loans and Credit Scores

Refinancing is when you get a loan from one lender and use that to pay off a previous loan from another lender. Thereafter, you start making monthly payments to the new lender.

If you refinance your federal student loans with a private lender, you could benefit from lower monthly payments or a lower rate if you have good credit. However, it is important to keep in mind that you will also no longer have access to the benefits of federal student loans such as:

  • income-driven repayment plans
  • loan forgiveness
  • loan forbearance 
  • payment deferment.

It is not possible to refinance a private student loan with a federal one.

How Your Credit Score Can Affect New Student Loans

If you need to get a new student loan, but your credit score is not good, you still have options. Not all lenders use your credit score when deciding whether to grant a loan application.

Most kinds of federal student loans don’t require any kind of credit check. One exception is the federal direct PLUS student loan. 

Several private student loan lenders also use other criteria besides your credit score. For example, some agreements are based on your future income.

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Final Thoughts 

When figuring out how student loans affect credit scores, it is important to understand what a credit score is. The biggest negative effect on your credit score comes from missed payments. However, this effect is not instant. Your credit score only gets affected 1 or 3 months after you miss the payment for private and federal student loans respectively. If you need to take out new student loans, some options do not depend on your credit score.