Can Student Loans Affect My Credit Score While in School?

Written by: Kristyn Pilgrim
Updated: 6/11/20

You know that loans can impact your credit score but may have heard that student loans are treated a little differently than personal loans. So, what’s so different about student loans, and can they affect your credit score even while you’re still in school? 

The short answer is yes, student loans can affect your credit score, even before your graduate. This guide will provide all the answers you need to understand what’s different about student loans and how they typically affect credit scores.

How Student Loans Differ From Personal Loans

Student loans are different from personal loans in a few ways. First, student loans are exclusively issued to be used for educational expenses, with some loans going directly to the school. You apply for this type of loan, and whether your student loan is federal (backed by the government) or private (backed by a financial institution) will determine if you’ll need a minimum credit score for approval. Many students receive federal student loans without a credit history.

Personal loans, however, can be used for just about any borrowing purpose, have a fixed sum, and require certain credit criteria for approval.

Student loans also have flexible repayment options. Most federal student loans, for instance, are deferred until six months after you graduate. This means you are not required to pay on them until six months after you receive your degree, and your credit report will not be negatively impacted by not making payments before then.

In addition, federal student loans can be subsidized or unsubsidized. For Direct subsidized loans, the Department of Education will pay any interest while you’re in school at least half-time, for the first six months after graduation, and during deferment. With Direct unsubsidized loans, however, the borrower is responsible for any interest during all periods. If you do choose not to pay interest while in school or during a grace period or deferment, interest will still accrue and be added to the principal amount of the loan.

Personal loans don’t offer this type of flexibility, with a fairly rigid minimum payment due each month, regardless of your educational status.

Student Loans and Credit Scores

If you’re a student, you may have a relatively new credit history or none at all. Since college students coming directly out of high school often have no credit (and sometimes are not even 18 years of age), student loans can be secured through the government to help pay for tuition without requiring credit history.

How does this impact your credit score while in school? If you need aid and can secure a student loan, you’ll be able to begin building your credit history. And if your student loans are deferred, they will show on your credit history but will neither harm nor help your credit score. They can impact your credit history, however, which could improve your score if the account continues to age.

Additionally, having student loans on your credit report can prove to be helpful as you begin paying them off. To better understand how your student loans can impact your credit score while in school, let’s take a look at how your credit score is calculated.

How Your Credit Score Is Calculated

Your credit score is a number between 300 and 850 that is used to sum up how you handle debt repayments. This score is typically used by banks and financial institutions when you apply for any type of financing to see if you’re a creditworthy borrower or if there are red flags they should look out for. This score is also referred to as your FICO score, named after FICO, the company that manages your scores.

According to Experian (one of the three major credit reporting agencies), a good credit score ranges between 670 and 739, a very good score is between 740 and 799, and an exceptional score is 800 or above. Your score is considered fair if it’s between 580 and 669 and poor if it’s 579 or below.

There’s a lot that can go into calculating your credit score, but these five factors are the most prominent:

Length of Accounts

According to FICO, the length of your credit report plays a large role in determining your creditworthiness (impacting 15% of your score). Student loans can help lengthen your credit history in a couple of ways. First, for many borrowers, they’re often the first accounts on their credit report. Second, these loans typically take a decade or longer to pay off, meaning they’ll be on your report for quite some time. So, while your student loans won’t really impact your score while you’re in school, they can help beef up your credit report once you graduate.

Payment History

Your FICO score is also determined by your payment history. Making on-time payments for the minimum amount due (or more) will reflect positively on your account, boosting your score. Missing payments or letting accounts go to debt collectors will reflect negatively on your score. Setting up payment plans you can afford after graduating will help boost your score.

Credit Utilization

This refers to the amount of revolving credit you’re using versus the amount available (for instance, using $100 out of $1,000 available). Typically, you want this rate to be below 30%. Student loans have a smaller impact on your utilization ratio because they are considered installment debt.

Account Types

This factor refers to the different types of accounts you hold, such as credit cards, student loans, personal loans, auto loans, and mortgages. The more diverse your credit mix, the higher your score (typically).

Application History

The number of times you apply for credit in the past two years also impacts your score. Applying for federal student loans that are not based on credit history will not impact this factor. However, if you apply for a student loan with a private lender or one that requires a co-signer, this can slightly impact your score, even while you’re in school.

How to Improve Your Credit Score While You’re in School

Overall, you won’t have to worry about your student loans impacting your credit score significantly while you’re in school if your loans are deferred. What you can focus on, though, is preparing yourself for graduation to ensure your loans reflect positively on your credit report. Without knowing what salary you’ll be making or how easy it will be to find a job, it’s important to plan ahead.

To minimize your student loans impacting your credit score negatively after graduation, you can:

  • Make payments while you’re in school. If you have extra money and can afford to pay down some of your debt, or even the interest on unsubsidized loans, you can help set yourself up for smaller monthly payments down the road.
  • Only borrow the minimum required. It may seem tempting to take out an extra $1,000 or so to get a better computer, nicer dorm room, or other amenities, but these costs add up. If you’re worried about your student loans impacting your credit score after graduation, make sure your monthly payments are lower by borrowing less.
  • Look for grants or scholarships in place of loans. Minimizing your student loan debt while you’re in school is a good way to prepare for the future. Spending the time searching for eligible scholarships, grants, or work-study programs might save you thousands or more in the long run and can help your credit score stay on track. 

Lastly, you’ll want to make sure you keep any personal credit card purchases or personal loans to a minimum if you don’t want to lower your credit score while you’re in school. Try only to use credit when needed, and always make the required minimum payment to avoid additional fees or credit score penalties. 

Keep Your Credit on Track With College Finance

The last thing you should have to worry about while you’re in school is your credit score. Luckily, deferred student loans won’t impact your credit score very much while you’re finishing your degree, allowing you to concentrate on learning and graduating. 
Are you worried about your credit score after graduation, however? College Finance has the resources to help. Find out which student loans you should pay off first to keep your credit score on point.