How Student Loans Affect Your Credit Score?

Updated on April 10, 2024

At a Glance

  • Student loans, whether federal or private, impact your credit score.
  • Federal loans, including Direct Subsidized, Unsubsidized, PLUS, and Consolidation Loans, are backed by the U.S. Department of Education.
  • Timely payments on both federal and private loans contribute to a positive credit history; federal loans involve soft inquiries, while private loans may result in hard inquiries.

As the pursuit of higher education becomes increasingly common, student loans have become an integral part of many students’ lives. While these loans may appear daunting, it’s important to understand their influence on your credit score. This article will discuss the relationship between student loans, your debt-to-income ratio, and their combined effect on your credit score and financial well-being.

Student Loan Types and Their Impact on Your Credit Score

Student loans and the type of student loans you have play a major role in how your credit score is determined. And your credit score can experience major shifts, for the better or worse, due to the way in which you manage your student loan payments.

Types of Student Loan

There are two major type of of student loans — federal and private. Depending on which type of loan you have, your credit score can be impacted differently.

Federal Student Loans are loans are backed by the U.S. Department of Education and offer several options:

  • Direct Subsidized Loans: These loans are based on financial need and have the advantage of the government covering the interest while you’re in school.
  • Direct Unsubsidized Loans: Available for both undergraduate and graduate students, these loans accrue interest from the moment they’re disbursed.
  • Direct PLUS Loans: Geared towards graduate students and parents of dependent undergraduates, these loans require a credit check and generally have a higher interest rate.
  • Direct Consolidation Loans: This type of loan allows you to merge multiple federal loans into a single, convenient payment.

Private Student Loans, on the other hand, are private loans are offered by banks, credit unions, and private lenders. These loans have varying terms and rates, as they’re not governed by the government.

While federal loans often offer more flexibility and benefits, private loans can be considered to bridge financial gaps if needed. It’s important to navigate these options carefully based on your individual circumstances.

How Federal Student Loans Impact Your Credit

When it comes to federal student loans, there are several ways they can influence your credit score:

  • On-time payments improves credit – Making consistent, on-time payments on your federal student loans can have a positive effect on your credit score. This demonstrates responsible financial behavior and adds positive information to your credit history.
  • Federal loans improve your credit mix – Federal loans can also contribute to diversifying your credit mix, which is generally beneficial for your credit score.
  • A lot of federal loans increases your debt load – However, it’s important to keep in mind that having a significant amount of federal student loan debt could potentially increase your overall debt load and impact your credit utilization ratio.
  • Federal loan can build credit history – On the positive side, federal student loans also contribute to the length of your credit history, which is another factor that affects your credit score.
  • Soft inquiries don’t impact credit – Moreover, applying for federal student loans typically involves a “soft” credit inquiry, which doesn’t have a negative impact on your credit score. This is in contrast to private student loans, which often require a “hard” credit inquiry during the application process.

How Private Student Loans Impact Your Credit

Private student loans, like federal loans, can impact your credit score in various ways:

  • On-time payments improves credit – Ensuring that you make timely payments on your private student loans is crucial for maintaining a positive credit history. Late payments or defaults can significantly harm your credit score.
  • High loan balances impact credit utilization – Additionally, private student loans can influence your credit utilization ratio, especially if you have high loan balances relative to your available credit.
  • Private loans also build credit history – Similar to federal loans, private student loans also contribute to the length of your credit history. However, their impact might be relatively less significant due to their typically shorter repayment terms.
  • Hard inquiries lower credit scores – Unlike federal loans, applying for private student loans often involves a “hard” credit inquiry, which can temporarily lower your credit score.

Ultimately, both federal and private student loans have implications for your credit score, with factors such as payment history, credit utilization, and credit history length playing key roles. It’s important to manage both types of loans responsibly to maintain a positive credit profile. Federal loans, given their more flexible repayment options and borrower protections, generally have a more favorable impact on your credit score compared to private loans.

Certainly! Here’s a reworked section focusing on managing student loans to minimize their impact on a borrower’s credit score:

READ MORE: How Student Debt Can Impact Your Social Security Benefits

9 Ways to Minimize Student Loan Impact on Your Credit Score

Having student loans is a reality for many, but how you manage them can make a significant difference in your credit score and financial health. Here’s how to ensure they have a minimal negative impact:

  1. Timely Payments: The single most effective way to maintain a healthy credit score with student loans is consistent, on-time monthly payments. Even one late payment can dent your credit score, so set up reminders or automate your payments to ensure timeliness.
  2. Consider Income-Driven Repayment Plans: These plans adjust your monthly student loan payment based on your income and family size. By ensuring payments are proportional to your income, they become more manageable and less likely to be missed.
  3. Loan Consolidation: Combining multiple federal student loans into one can simplify your payments. With only one monthly payment to track, the likelihood of missing a payment diminishes. However, carefully evaluate interest rates before consolidating to ensure you don’t end up paying more over the loan’s lifespan.
  4. Loan Refinancing: This involves replacing your student loan(s) with a new loan from a private lender, often at a lower interest rate. While this can save you money, be aware that refinancing federal loans with a private lender means losing federal loan benefits, like income-driven repayment or loan forgiveness options.
  5. Stay Informed of Loan Grace Periods: Many student loans have a grace period after graduation, during which payments aren’t required. Use this time wisely – plan your finances, set up a repayment strategy, and start payments early if possible.
  6. Seek Loan Forgiveness Programs: Some professions, especially in public service, offer loan forgiveness after a certain number of qualifying payments. Research if you’re eligible and understand the criteria.
  7. Regularly Check Your Credit Report: Mistakes happen. Regularly review your credit report to ensure your student loan payments are correctly reported. If you spot errors, contact the credit bureaus and your loan servicer to rectify them.
  8. Avoid Default at All Costs: If you’re struggling to make payments, reach out to your loan servicer. They may offer deferment, forbearance, or alternative payment plans. Defaulting will severely impact your credit score and can have long-lasting financial repercussions.

While student loans are a substantial financial commitment, proactive management can mitigate their impact on your credit score. By staying informed and making strategic decisions, you can navigate the challenges of student loans and maintain a healthy financial profile.

Best Private Student Loans for Minimal Credit Score Impact

To minimize the impact of student loans on your credit, you’ll want to make sure you work only with reputable lenders. Our picks for best private student loans are below. 

AmOne (Best for Okay to Good Credit)

AmOne functions as a loan-matching platform, focusing on connecting students with suitable private student loans based on their individual needs. If you’re venturing into the private student loan space, AmOne offers a way to compare various lenders’ rates and terms. This service makes the search for the right student loan more efficient, especially given the variety of lenders they work with, each catering to different credit profiles and loan needs.

AmOne Personal Loans

4.5
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

600

Fixed APR

3.99%-35.99%

Variable APR

N/A

Overview

  • Minimum credit score: 600.
  • Fixed APR: 3.99%-35.99%.
  • Loan amounts: $1,000 to $50,000.
  • Repayment: 1 to 7 years.

Qualifications

  • Must be at least 18 years old.
  • Must be a U.S. citizen or permanent resident.
  • While there’s no specific income requirement, a consistent source of income is essential for the applicant.

Pros

  • Suitable for individuals with lower credit scores.
  • No cost for the matching service.
  • Attractive loan rates.

Cons

  • Acts as an intermediary, not a direct lender.
  • Risk of multiple contacts from prospective lenders.
  • Lack of clarity on lender details.

Spring Loans (Best for Bad and No Credit)

While Spring Loans has made a name for itself in the personal loan sector, its visibility in the private student loan market is less pronounced. However, if they do branch out into this niche, potential borrowers can expect a streamlined loan process and competitive interest rates, given their reputation in other domains. Always ensure to check their current offerings and eligibility criteria before proceeding.

Spring Loans Personal Loans

4.2
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

None

Fixed APR

27.00%

Variable APR

N/A

Overview

  • Minimum credit score: None.
  • Fixed APR: 27.00%
  • Loan amounts: $3,000.
  • Repayment: 48 months.

Qualifications

  • Demonstrate a recurrent income.
  • Minimum age prerequisite: 18 years.
  • Validate U.S. citizenship status with an SSN.
  • Provide a legitimate U.S. driver’s license or a state identity card.
  • Establish a functional bank account for incoming deposits.
  • Adhere to any specific demands by the loan provider.

Pros

  • Open to applicants with any credit background.
  • Four-year loan period aids in structured financial management.
  • The $3,000 offer addresses several short-term financial challenges.
  • Wide-reaching eligibility criteria invite a broad spectrum of applicants.
  • The focus on dependable income over job title benefits varied income sources.

Cons

  • The set 27% APR is higher than many alternatives.
  • Restriction to a $3,000 loan might not cover all financial outlays.
  • Possessing specific IDs is mandatory, sidelining some applicants.
  • A prerequisite for an ongoing bank account may limit certain users.

First Premier Lending (Best for Bad Credit)

First Premier Lending emphasizes flexibility and a tailored borrowing experience, characteristics that can be invaluable for students seeking private loans. They offer both secured and unsecured loan options, a rare feature in the student loan arena. While their quick approval process can be a boon for students on tight timelines, it’s vital to compare their rates and terms against other dedicated student loan providers.

First Premier Lending Personal Loans

4.2
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

None

Fixed APR

27.00%

Variable APR

N/A

Overview

  • Minimum credit score: None.
  • Fixed APR: 27.00%.
  • Loan amounts: $3,000.
  • Repayment: 48 months.

Qualifications

  • Maintain a consistent source of income.
  • Must be at least 18 years of age.
  • Possess valid U.S. citizenship and a legitimate social security number.
  • Hold a current U.S. driver’s license or state-issued ID.
  • Keep an active bank account for direct deposit.
  • Satisfy any lender-specific criteria, such as credit rating, borrowing history, or place of residence.

Pros

  • No minimum credit score requirement allows accessibility for those with varied credit histories.
  • 48-month term provides clarity and allows for long-term financial planning.
  • Specific loan amount of $3,000 can meet many short-term financial needs.
  • Broad set of qualifications make the loan accessible to a wide range of people.
  • Emphasis on consistent income, not necessarily employment type, allows flexibility for borrowers.

Cons

  • A fixed APR of 27% is relatively high.
  • Loan amount is capped at $3,000, which might not cater to larger financial requirements.
  • Requirement of a U.S. driver’s license or state-issued ID could exclude some individuals.
  • Mandatory active bank account could be limiting for those who are unbanked.

College Ave (Best for Good Credit)

College Ave stands out as a dedicated student loan provider, with a clear understanding of students’ unique needs and challenges. They offer both undergraduate and graduate private student loans with various repayment options, from interest-only payments while in school to deferred payments. College Ave is renowned for its flexibility, competitive interest rates, and transparent terms, making it a top contender in the private student loan market.

College Ave Undergraduate Private Student Loans

4.8
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

600 or better

Fixed APR

4.07% - 15.48%

Variable APR

5.59% - 16.69%

Overview

  • Minimum credit score: 600 or better.
  • Fixed APR: 4.07% – 15.48%.
  • Loan amounts: $1,000 – $150,000.
  • Repayment: 5, 8, 10, 15, and 20 years.

Qualifications

  • U.S. citizen or permanent resident.
  • For undergraduate loans: Part-time enrollment at an accredited college/university.
  • International students: Need a Social Security number and a co-signer.
  • For refinance loans: Must be 18 years or older.
  • For refinance loans: Graduation from an eligible school is required.

Pros

  • Prequalify with a soft credit check
  • Flexible repayment options
  • Offers co-signer release for private loans

Cons

  • Charges late fees
  • Must have graduated to be eligible to refinance
  • Half of repayment term must have passed to release co-signer

Sallie Mae (Best for Very Good Credit)

Sallie Mae is a powerhouse in the student loan sector, boasting a long history of providing both federal and private student loans. They offer loans for undergraduates, graduates, and professional studies with features like no origination fees and no prepayment penalties. Their interest rates are competitive, and their loan terms are designed with students in mind. Features such as the option for interest-only payments while in school and a grace period post-graduation further enhance Sallie Mae’s attractiveness as a private student loan provider.

Sallie Mae Undergraduate Private Student Loans

4.5
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

Mid-600's

Fixed APR

4.50-15.49%

Variable APR

6.37-16.70%

Overview

  • Minimum credit score: Mid-600’s.
  • Fixed APR: 4.50-15.49%
  • Variable APR: 6.37-16.70%
  • Loan amounts: Minimum of $1,000 per year.
  • Repayment: 10 to 15 years.

Qualifications

  • Typical credit score of approved borrowers or co-signers: Does not disclose.
  • Minimum income: Did not disclose.
  • Loan amounts: $1,000 up to 100% of the school-certified expenses.

Pros

  • One of the few lenders to provide loans to part-time students.
  • Non-U.S. citizens, including DACA students, can apply with a U.S. co-signer.

Cons

  • You can’t see if you’ll qualify and what rate you’ll get without a hard credit check.

Final Thoughts

Your credit score, a vital metric of your financial health, can significantly benefit from informed decisions and diligent management of your student loans. It’s crucial to remember that while student loans may be a necessary step towards your educational and professional goals, they need not become a lifelong burden. With the right information, strategies, and a proactive approach, you can manage your debt efficiently, safeguard your credit score, and lay the groundwork for a secure financial future. Remember, the choices you make today will impact your financial profile for years to come, so choose wisely and stay informed.

JOIN OUR NEWSLETTER
I agree to have my personal information transfered to MailChimp ( more information )
Join over 100,000 visitors who are receiving our newsletter and learn more about finance, immigration, and more!
We hate spam. Your email address will not be sold or shared with anyone else.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

Check your loan offer in minutes

Apply for a loan with 100+ partners with one application. It takes only 2 mins and doesn’t impact your credit score.

*checking your rate doesn’t impact your credit score

Get the Checklist