Student Loans and Your Credit Score: Understand the Impact

Written by: The College Finance Team
Updated: 4/14/20

Almost 45 million people in the United States have student loan debt. It is one of the biggest forms of personal debt in America.

Student loans can impact your credit score in two ways: They can help it or hurt it.

Student loans can help you build credit as a college student without much credit history, as long as you are able to consistently make your monthly payments. If you miss payments and end up delinquent on your student loans, your credit score will be negatively impacted. 

How Do Student Loans Affect a Person’s Credit Score?

The biggest factor in determining your FICO credit score is your payment history. More than a third of your credit report is determined by this. If you regularly make your monthly payments on time, you can build credit and boost your credit score. 

The reverse is also true. Usually, student loans are fairly forgiving, so if you are late on one or two payments, you are usually all right if you are able to catch up.

With federal student loans, they will not report a missed payment to the three major credit bureaus until you are 90 days delinquent. Private student loans regularly report once you are 30 days late. Loan lenders often charge a late fee as soon as your payment date passes, however.

If your account falls into delinquency, this will stay on your credit report for seven years. The more behind you fall, the more your credit score will drop.

Using Student Loans to Improve Your Credit

There are two types of credit: revolving credit, which includes credit cards, and installment credit, such as student loans, auto loans, and home mortgages. A student loan is an installment loan.

This means that you borrow a certain amount in total and then have a set amount of time and fixed payments to pay it back. Your monthly payments typically remain the same.

With revolving credit, like a credit card, you can keep borrowing the same money over and over, up to your credit limit, as long as you make your payments each month. Your monthly payments change based on what you borrowed that month.

Your credit score also takes into account the type of credit you have. It can benefit you to have different types of loans and a varied credit file. For instance, if you have both a student loan and a credit card, and make your monthly payments on time each month, your credit score can go up.

Student loans typically have low interest rates and manageable monthly payments. The best way to use them to improve your credit score is to keep up with your payments. Make your monthly payments on time and in full each month.

Co-Signers and Parent PLUS Loans

If you had a co-signer on your loan, both your and your co-signer’s credit will be negatively impacted if you can’t make your payments on time.

Both you and the person with good credit who agreed to be the co-signer entered into the loan contract together. As a result, both of you are responsible for the loan being paid on time. 

With a federal parent PLUS loan, the parent taking out the loan will have their credit impacted by on-time or late payments. If you are an undergraduate student, your credit will not be affected by a parent PLUS loan, as you did not take out the loan yourself. This can be both good and bad, as it won’t hurt your credit but it can’t help you to build credit, either.

Protecting Your Credit Score

Student loans, and particularly federal loans, often have flexible repayment options and will work with you to make sure that you can manage your monthly payments. When you take out a student loan, be sure to only borrow as much money as you absolutely need. 

Here are some tips for managing your student loan payments and keeping your credit score safe:

  • Make your monthly payments on time. Consider setting up an autopay feature to make it easier and more manageable.
  • Contact your loan servicer or lender as soon as you think you might have a problem making your student loan payments. There are often many options for repayment, including flexible income-driven repayment plans, that can make it easier for you to make your payments.
  • Consider consolidating your loans. Student loan consolidation can make your loan payments more manageable by combining multiple bills into one simple payment each month. Look closely at everything associated with loan consolidation, however, as doing this can make you ineligible for some of your initial loan benefits.
  • Budget for your student loans, and make them a priority. Even though student loans have low interest rates, it is still important to pay them every month. Missing or late payments can increase your debt and hurt your credit score for years to come.

Student loans can both help or hurt your credit score, depending on how you use them. If you make your payments on time every month, your score improves, but the opposite is also true.

To protect and enhance your credit score, keep up with your student loan payments, and reach out to your loan lender immediately if you think you are going to run into trouble.