Can Student Loans Impact My Credit Score?

Written by: Kristyn Pilgrim
Updated: 6/10/20

Student loans can impact your credit score. Your credit score is calculated based on your payment history, credit utilization (how much of your available credit you’re using), your credit history, your credit card mix, and new credit accounts. A credit score reflects how creditworthy you appear to lenders. A student loan contributes to your account mix, credit history, and payment history.

Monthly reporting to the three major credit bureaus – Experian, Equifax, and TransUnion – occurs once you begin making payments, either immediately after graduating or six to nine months after graduation (if your student loans are deferred).

Even if your loans are deferred, the total amount borrowed (that you will have to repay) will impact your credit score.

How Credit Scores Are Calculated

Your credit score is calculated by combining multiple elements. When calculating your FICO Score, each category your credit score is based on is valued with a certain percentage.

  • Payment history: Whether you’ve paid past credit accounts on time; it accounts for 35% of your FICO Score.
  • Amounts owed (credit utilization): Accounts for 30% of your FICO Score; using a large percentage of your overall available credit can indicate you are overextended and might have difficulties repaying what you’re borrowing.
  • Length of credit history: Accounts for 15% of your FICO Score, which calculates how long your credit accounts have been established.
  • Credit mix: Accounts for 10% of your FICO Score, focusing on credit cards, mortgage loans, installment loans, and retail accounts.
  • New credit: Accounts for 10% of your FICO Score, indicating that if you open several accounts in a short period, you are a greater lending risk.

Credit Score Ranges

Credit scores typically range from 300 to 850. For lenders, the higher an individual’s score, the lower a risk they are considered. Good credit scores are those ranging from 670 to 739. 

Credit scores are divided into five categories: poor, fair, good, very good, and exceptional, which describe the risk and where you stand against the U.S. average for credit scores.

  • Poor: Less than 580
    • If your score fits into the poor category, lenders may believe you are a risk; this score is well below the U.S. average.
  • Fair: 580 to 669
    • Many lenders will approve loans with a fair score, but it is below the average for U.S. consumers.
  • Good: 670 to 739
    • Lenders consider a good score to be good. It’s nearly or slightly above average for U.S. consumers.
  • Very good: 740 to 799
    • A very good score is above average and indicates that the borrower is very dependable.
  • Exceptional: 800 and higher
    • An exceptional score indicates to lenders that the borrower is an exceptionally low risk and is well above the average score for U.S. consumers.

Credit Score Benefits and Drawbacks to Student Loans

By being a responsible lender, your credit score can benefit from student loans. If you repay your student loans on time, they can positively impact your credit score; if you miss a payment, your credit score will be adversely affected.

Credit Score Benefits of Student Loans

Paying your student loans on time helps to establish a payment history. Student loan payments are reported to credit bureaus and are a great way to start building credit or if you’ve only recently started to build your credit through a store card or credit card.

Typically, student loans come with a 10-year repayment plan. Paying off your loan over this time will establish a long credit history of repaying your debts in a timely manner. This will help your credit score by showing that you consistently pay your loan payments on time.

Student loans add an additional type of credit to your credit mix. Typical types of credit include credit cards, auto loans, and mortgages. Student loans are an additional type of credit, showing you have diversity in the types of credit you use.

Credit Score Drawbacks of Student Loans

Your credit can be negatively impacted if you don’t manage your payments correctly. If you are at least 270 days behind on payment (in default), that missed payment will remain on your credit report for up to seven years. 

The first day after missing a payment, your loan will be classified as delinquent and past due. Once you pay it or arrange for deferment, forbearance, or you change your payment plan, it will no longer be delinquent. If you haven’t paid your student loan payment for 90 days or more, then it will be reported to the three major credit bureaus. You risk your loan going into default. 

To avoid default, you should understand your loan and loan agreement, manage your borrowing and only borrow what you need to cover your college expenses, keep track of your loans online to stay informed, and keep good records by organizing your: financial aid offers, loan counseling materials, promissory notes, amounts of student loans you owe, contact information for your loan servicer, loan disclosures, payment schedules, records of your payments, documentation showing when your loan was paid in full, and notes about any contact you have with loan servicers – including who you spoke with, when, and why.

However, if you find yourself at least nine months past due on your student loan, it could go into default. As a result, your wages could be garnished, and your tax refunds could be withheld.

If you need help making student loan payments, first check to see if another repayment plan will be a better fit (switching repayment plans for federal loans is free).

There are many programs available to assist you with your federal student loan payments. The Revised Pay As You Earn (PAYE) Repayment Plan, Pay As You Earn (PAYE) Repayment Plan, Income-Based Repayment (IBR) Plan, Income-Contingent Repayment (ICR) Plan, and Income-Sensitive Repayment Plan are based on your income. These plans will cost more than the standard 10-year plan in the long run but will help cap your payments to a portion of your income. Additionally, some offer loan forgiveness after 20 or 25 years.

If none of these plans fits your needs, it is possible to apply to temporarily suspend your payments if you are eligible for deferment or forbearance. Often, interest will continue to accrue if you are in deferment or forbearance, increasing the overall balance over the life of your loan. If you are counting down the months until loan forgiveness, the time spent in forbearance or deferment is often not counted toward the forgiveness requirements. 

Another option to make student loan payments more manageable is through debt consolidation. Debt consolidation lumps all of your payments into one, making repayment easier – and helping your credit score in the long run. Debt consolidation might temporarily lower your credit score, but the drop is usually not significant, and your credit score will rebound within a year or two.

Expert Advice for Student Loan Credit

If you can pay off your student loan in full, pay it off. Adding a free, no-fee credit card can replace the student loan, contributing to your credit mix. However, be sure to always pay your credit card on time and in full every month.

If paying off your loans in full isn’t an option, make sure you’re making monthly payments that allow you to still live within your means. If possible, try automated student loan payments; this will make them easier to manage, and in some cases, you can get a discount for automatic direct debits.

If you are careful to pay your student loans on time, then they will positively impact your credit score. There are many resources available on College Finance to help you navigate your student loans and credit score, including explaining how to get loans as a college student without credit, how to refinance loans with bad credit, and how to navigate the options involved with loan repayment.