During the pandemic, many Americans were able to pay down their credit card debt and clean up their credit report of everything except their student loans.
Student loan debt affects your credit score in various ways. Miss a payment, and it may take several months to raise your score enough to qualify for credit products at lower interest rates (e.g., a conventional mortgage or 0% financing on a car).
Here’s what you need to know about how student loans affect your credit score.
- You can still have a good score even though you have a high student loan balance.
- The key to having great credit with student loans is to make payments on time and ask for a deferment or forbearance when necessary.
- Consolidation won’t affect your score, but refinancing student loans with a private lender can cause your score to dip
Disclaimer: While I do recommend some products with affiliate links in this post, they’re ones I’ve seen work over years of experience as a student loan lawyer. I started this business to help a friend, and I’ll treat you with the same respect.
How a credit score is calculated
Two companies dominate credit scoring: FICO and VantageScore. Generally, they both use a credit score range of 300 to 850, with 300 considered poor and 850 excellent. As of this April, the average FICO credit score is 716, which is the highest it’s been in almost two decades.
Both credit scoring models look at the same 5 categories to calculate your score. But the first two matter the most:
- Payment history: counts for 35% of your score. Late or missed monthly payments can drop your score by nearly 100 points. If you want a good credit score, avoid delinquency. Make on-time payments.
- Credit utilization: is based solely on the balances of credit cards, personal lines of credit, and other revolving accounts. Student loans are installment loans and don’t affect your debt usage. So whether you owe $10 thousand or $100 thousand in student loan debt, the balance will have the same impact on your score.
While the first two factors account for about 65% of your overall score, these three are still worth watching.
- Length of credit history: improves your score the longer you keep credit and the higher the average age of your accounts.
- Credit mix: rewards having a mixture of different types of credit, car loan, mortgage, credit card, student loans, etc.
- New credit: applications cause a temporary drop in your score. These hard inquiries will stay on your credit report for about two years but stop affecting it in less than a year.
Can you get a 700 credit score with student loan debt? You can have high student loan debt and still have a 700+ credit score. Nearly 38% of student loan borrowers have a score at least that high.
How long can student loans stay on your credit report? Student loans will remain on your credit report until they’re forgiven, paid in full, or you default. Your loans will stay on your report until they go away 7 years later — unless you get them removed after settling.
How student loans affect your credit score
Student loans affect your credit score in two main ways:
- payment history
- credit inquiry
However, your loan balance has a limited effect on your credit score.
The 3 major credit bureaus treat student loans as installment loans, meaning they carry a starting balance that’s repaid over time with a set number of payments. Home mortgages, auto loans, personal loans also fall into this category.
Unlike credit cards and other revolving debts, the balance of your installment loans doesn’t negatively affect your credit score. So whether you owe $1 thousand or $100 thousand in student loan debt, both have the same impact on your score.
Student loan balance and debt-to-income ratio: Although the balance you owe won’t stop you from having good credit, it can increase your debt-to-income ratio. Lenders use your DTI to determine how much home you can afford. Thankfully, after a recent rule change, the Federal Housing Administration (FHA) allows future homeowners to use their payment amount under an income-driven repayment plan for their DTI.
While installment account balances don’t affect your score, paying on time can. Being late or missing a student loan payment negatively impacts your credit. The impact is compounded when you have more than one student loan that’s delinquent or in default. (Not to mention, it can be difficult to know who to pay if your credit report shows your student loan was permanently assigned to the government.)
Payment history counts for 35% of your FICO score. So before you miss a payment, explore your repayment options. Ask for a deferment or forbearance, or apply for an income-driven repayment plan.
Before a lender approves your loan application, it will pull your credit through a process known as a hard inquiry. These types of pulls can lower your credit score.
Thankfully, the Department of Education does a hard pull only for new PLUS Loan applicants. It doesn’t check your creditworthiness when you apply for a Direct Consolidation Loan through studentaid.gov.
However, private lenders will always pull your credit file whether you’re getting a new loan or are refinancing. The good news is that most credit scoring models treat multiple inquires for one type of loan as a single inquiry if made within a short period of time. (FICO uses a 45-day window. VantageScore uses 14 days.)
If you’re looking to refinance but want to shop around for the lowest interest rate, use a website like credible.com. The company will do a soft pull that does not affect your score and give you personalized refinancing rates.
How often do student loans report to credit bureaus? Loan servicers report late payments on most federal student loans to the credit bureaus after 90 days. Some FFEL Loans are reported after 60 days. Private student loan lenders typically report late payments starting with your first missed payment. The lenders will keep reporting every 30 days until the loan is charged off, which usually happens after your account is 150 days late.
How do student loans affect credit score while you’re in school? Student loan debt can help college students raise their credit score in two ways: increasing the age of their accounts and making monthly payments while in school. Many private lenders allow students to pay their loans instead of putting the account in deferment or forbearance. The added benefit of doing this is lowering the interest that grows on the account.
Refinancing student loans
One of the best benefits of a good credit score is the ability to refinance student loan debt. Refinancing can qualify you for a lower interest rate and better repayment terms – especially if you have Parent PLUS Loans. It also may allow you to remove your cosigner.
There is a downside, however. When you refinance your federal loans, you lose federal benefits, such as student loan repayment based on income, loan forgiveness for public service, and discharge at death or due to permanent disability.
You can use a tool like credible.com to explore refinancing student loans with many lenders without harming your credit score.
Monitoring Credit and Repaying Student Debt
You can check your own credit — without hurting your score — to know what the lender is likely to see.
You can get a free credit score from a personal finance website like Credit Karma, which offers a VantageScore 3.0. Many credit card companies also provide their users with the ability to pull their reports and scores from Equifax, Experian, or TransUnion.
When monitoring, keep in mind that, like our bodyweight, scores fluctuate. So long as you keep your score in a healthy range, those variations won’t negatively impact your financial well-being.
Will discharged student loans increase my credit score? While discharged student loans typically won’t lower your credit score, you may see a slight difference if the loan is deleted from your credit report. Removing accounts, especially older loans, decreases the average age of your credit, which can cause your score to briefly dip.
Ready to get your student loans under control?
Student loans can have an outsized impact on your credit score. The key is to make sure you always have an affordable monthly payment to avoid delinquency and default. Let's talk if you want help exploring consolidation or refinancing student loans to lower your monthly payment. Schedule a call with me to learn how I can help.
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