A credit score is a three-digit number that lenders use to decide if a borrower is a good candidate for a loan — which is why having a good credit score is so important if you want to borrow money. Your credit score can also impact whether you’ll be able to rent a home, get a cell phone, or land a job.
There are many things that can impact your credit score — including student debt. If you’re wondering how student loans affect your credit score, here’s what you should know.
How student loans affect your credit score
For many college students, taking out a student loan is their first time borrowing money and establishing credit history — but getting the loan is only the first step. You’ll also need to responsibly manage your debt going forward to prevent damage to your credit score.
There are several credit scoring models that lenders may use, but the FICO credit score is the most common. These scores range from 300 to 850, and anything above 670 is considered good to excellent. Any accounts that appear on your credit report can be factored into your credit score, including your student loans, credit cards, or auto payments.
Here’s how your FICO score is calculated, and how student loans fit in.
Payment history (35%)
Your payment history makes up the largest piece of your credit score. Lenders want to see that you can make your payments on time and in full, so missing student loans payments can significantly hurt your credit.
Amounts owed (30%)
This factor looks at how many loans you have, how much you owe on your current debts, as well as how much of your credit limit you use on any revolving accounts. As you pay down your student loan and reduce what you owe, your credit score should benefit.
Age of credit history (15%)
Having a longer credit history is better for your score, and this factor considers the average age of your accounts, as well as the age of your oldest and newest accounts. Because student loans are often the first type of credit young people get, these debts can lengthen your credit history if you borrowed early in your college career.
Credit mix (10%)
Lenders like to see that you can successfully manage different types of credit, including installment loans (like student debt) and revolving accounts (like credit cards). If your student debt is your only type of installment loan, what you owe could positively impact your credit mix.
New credit (10%)
Opening several accounts in quick succession is a red flag to lenders, since it could indicate that you’re overextended. Your credit score can be influenced by how many hard inquiries you have on your credit report — that is, how many lenders are reviewing your credit before lending you money.
Your student loans may impact this factor in your credit score when you first apply for the debt, but the effect is typically small and short-lived.
Consequences of missed payments
Missing payments on your student loans can significantly affect your credit score. A student loan is generally considered delinquent after one missed payment. If you continue to miss payments for a certain amount of time — 270 days for most federal student loans and 90 days for many private student loans — your loan can enter default.
How long it will take for a late student loan payment to be reported to the credit bureaus and affect your credit score will depend on the type of loan you have.
- Federal student loans: Typically 90 days, depending on the loan servicer
- Private student loans: Typically 30 days, depending on the lender
Once a missed student loan payment is reported, it can begin dragging down your credit score. The more late payments you make, the worse the damage will be. Also keep in mind that a late payment can stay on your credit report for up to seven years, which could make it harder to access credit in the future.
Temporary benefits for federal student loans
Federal loan payments have restarted after a three-year pause. To aid borrowers, there is a temporary on-ramp period until Sept. 30, 2024. During this time, missed payments won’t be reported to credit bureaus and your credit score won’t be impacted.
Some of the other consequences that could come with defaulting on your debt include:
- Loan acceleration: Your entire balance could become due immediately.
- Loss of hardship benefits: If you have federal student loans in default, you’ll lose access to major federal benefits, such as deferment and forbearance. You’ll also be ineligible for any other federal financial aid.
- Wage garnishment: In some cases, your wages could be garnished or your tax refunds could be withheld.
- Collection costs: Your loan holder might send your defaulted loan to a collection agency, which will try to obtain payments from you. If this happens, you could be responsible for the collection costs incurred by your loan holder.
- Lawsuits: Lenders might sue you in an attempt to recoup their losses. This means you could get stuck with court costs or attorney fees.
How to avoid student loan default
If you’re struggling to afford your loans, here are some options that could help you avoid missed payments and student loan default:
1. Sign up for an income-driven repayment plan
If you have federal student loans, consider signing up for an income-driven repayment (IDR) plan. On an IDR plan, your payments are based on your earnings and family size — typically 10% to 20% of your discretionary income. Additionally, any remaining balance will be forgiven after making payments for 20 or 25 years, depending on the plan.
2. Request deferment or forbearance
Student loan deferment and forbearance are two ways to temporarily pause your payments. Keep in mind that interest will continue to accrue on most loans while they’re paused, so this is best saved as a short-term solution.
Also note that while federal loans come with built-in deferment and forbearance options, private lenders provide this kind of assistance at their discretion. Contact your servicer or lender to see what options are available to you.
3. Consolidate your federal student loans
If you have federal student loans, you can combine them into a federal Direct Consolidation Loan. With this option, you can extend your repayment term up to 30 years, which could greatly reduce your monthly payments. Just keep in mind that you typically pay more in interest over time with a longer term.
4. Refinance your student loans
Student loan refinancing is the process of taking out a new private student loan to pay off your old debts, leaving you with just one loan and payment to manage.
Depending on your credit, you might get a lower interest rate through refinancing, which could save you money on interest and potentially help you pay off your loan faster. Or, you could opt to extend your repayment term and reduce your monthly payments — though remember that this means you’ll likely pay more in interest charges.
Keep in mind: While you can refinance both federal and private loans, refinancing federal student loans means you’ll no longer have access to federal benefits and protections — such as IDR plans and student loan forgiveness programs.
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Can student loans affect a cosigner’s credit?
A cosigner is someone who agrees to share responsibility for your loan. If you take out a student loan with a cosigner and don’t make your payments, your cosigner will be on the hook and their credit could be damaged.
Late or missed payments will also show up on your cosigner’s credit report — which could keep them from getting approved for a loan of their own, such as a mortgage. If you ask someone to cosign a student loan for you, make sure they understand these potential risks before they agree to anything.
Tip
Many private lenders allow you to remove a cosigner from the loan after you meet certain conditions — usually making consecutive on-time payments for a specific amount of time and meeting the underwriting criteria on your own.
Does paying student loans build credit?
By paying your student loans on time, you can establish a positive payment history and build your credit over time. The more on-time payments you make, the better shape your credit will be in.
Your student loans might also help improve your credit score in other ways, such as:
- Diversifying your credit mix: Taking out a student loan can add another kind of installment loan to your credit mix and potentially boost your credit score.
- Lengthening your credit history: Another factor in your credit score is the length of your credit history. Depending on the type of student loan you have, it could take up to 20 or 30 years to repay it, which can add to your credit history length and improve your credit score.
How does refinancing student loans affect your credit score?
Another way that student loans could affect your credit score is if you choose to refinance them.
When you apply for refinancing, the lender will perform a hard credit check to determine if you’re a strong candidate for a loan. This could decrease your credit score by a few points — though this is typically only short-lived and your score will likely rise again within a few months.
Most refinancing lenders will show you rates with only a soft credit check that won’t affect your credit — for example, you can check your prequalified rates from Credible’s partner lenders with no impact on your credit.
This can also help you avoid applying with several lenders and having multiple hard credit inquiries, which could drag down your credit score. Just keep in mind that the rates you prequalify for aren’t final and could change when you actually apply for the loan.
If you want to apply with more than one lender, be sure to do so within a short period of time — credit-scoring models usually take rate-shopping into account, so multiple inquiries over a brief time period will generally be counted as just one inquiry.
