Do Student Loans Affect Credit?

Americans—some 44 million of them—have around $1.5 trillion in student loan debt. What does all that debt due to the credit of those 44 million Americans? Do student loans even affect credit?

Debt aside, there is an upside to having a student loan beyond the obvious of paying for college. Student loans can be good for young consumers’ credit scores. Student loans help consumers qualify for other lines of credit later on. On the flip side, not paying your student loans or making late student loan payments can seriously hurt your credit.

If you’re among the 44 million Americans with student loan debt or you’re considering a student loan, knowing just how student loans and student loan debt affect credit can help you ensure good credit and better set yourself up for a bright financial future.

Do Student Loans Help Your Credit?

Credit scores are calculated by the credit bureaus using certain factors from your credit report, including:

Payment history
Debt levels
The age of credit
Debt diversity

Having a student loan affects the age of your credit and debt diversity—AKA account mix. And responsibly managing the loan affects your payment history.

Having student loans lets you establish a credit history—AKA credit age—if you don’t have one already or have one that is “young.” Credit history helps those who can’t qualify for revolving credit—credit cards and similar types of credit. If you do have a credit card or cards, a student loan improves the diversity of your account mix—since it’s an installment loan.

When you take out an installment loan, like a student loan or car loan, you take out a lump sum of money. Then, you pay that sum back over time with fixed regular payments. That installment loan doesn’t really affect anything but your account mix. You might think it affects debt usage—the amount of your revolving credit limits you’re currently using. But an installment loan isn’t revolving credit, so it doesn’t affect debt usage.

A student loan can strengthen not only your account mix but also your payment history. Payment history is the most important aspect of your credit scores. It makes up 35% of your scores. Late payments on any debt hurt credit scores, but making your monthly payments on time is a gold star on your payment history.

Ironically, your loan balance has little impact on your credit scores. Your scores really come down to your payment history, which is why it’s important to take on a manageable debt load and, if you’re unable to repay your loan on time, take advantage of any available student loan repayment assistance.

How Can Student Loans Hurt Credit?

Student loans hurt your credit if you get behind on your payments. It’s that simple—or difficult if you can’t make the payment.

A single late payment may or may not hurt your score. But multiple late payments can crush it. Lenders typically report accounts that are at least 30 days past due to the credit reporting agencies. So, if you miss a payment, make it as soon as you can. Because if you can make it within the 30-day window, it may not be reported at all. If it does get reported, it can drop your score by 90 or more points. That drop can stay on your report for up to seven years. And the cumulative effects can be much worse if you continue to miss payments and go into default.

Payments on a student loan though don’t necessarily start when you first take out the loan. When it comes to federal student loans, you’re generally expected to start making payments six months after you graduate. Making those payments is referred to as repayment. Private student loans may require repayment right way. In either case, until your loan enters repayment status, your credit won’t get penalized for missed payments.

On a smaller scale, applying for a new private student loan account and some federal student loan programs puts a hard inquiry on your credit report, which can shave a few points off your credit scores. A new account appears separately from the inquiry on a credit report, and also results in a slight short-term dip.

The good news is that student loan inquiries, as with mortgages and auto loans, are “deduplicated” on credit reports. That means multiple inquiries in a short period of time—typically between 14 and 45 days—act as a single inquiry depending on the credit scoring model. Because of that, you can shop for the best deal if you do it fairly quickly without affecting your credit scores.

Types of Student Loans

Even though student loans are grouped with other installment loans on your credit reports, there are some differences between types of student loans that can affect your credit.

Private Loan

Private loans are hard to get if you don’t already have a good credit score or have someone with a good score that cosigns for your loan.

Private lenders run credit checks to decide whether or not they give you a private student loan. If you have a credit score that’s on the low end but still passes their check, you can expect to pay a higher interest rate on the loan.

A private student loan can help your credit score if you qualify for one. Also, if you get a private loan with a high interest rate, you want to make sure you can keep up with the payments.

Federal Loan

If you start college after high school, chances are good you don’t have a credit score. Having no credit history or score can make it just as hard to borrow as having a low credit score. A federal loan is a good option if you fall in this category because you can get a federal loan with no credit check at all. And when you take out federal student loans, you get an open credit file, so you can start building a credit score.

Parent Plus Loan

Some loans, such as federal PLUS loans, and certain private loans, are taken out by your parent(s), not you, the student.

Even if you ultimately pay back the balance of the loan yourself, your parent’s name is on the loan. As such, a parent plus loan won’t build your credit history or credit score. However, a loan that doesn’t have your name on it also can’t hurt your credit if a payment is missed, although it will hurt your parents’ credit.

How to Keep Student Loans from Hurting Your Credit

There are programs in place that can help student loan account holders make good on payments—or defer payments until they’re in a better place financially. If you’re struggling to make your student loan payments, call your servicer to find out what options are available.

Federal student loans, for instance, are eligible for forbearance, deferment and income-based repayment plans. Taking advantage of those options won’t negatively impact your credit in any way.

If you’ve already missed payments on a federal student loan, you can look into loan rehabilitation. That program helps you return to current repayment status and have the default removed from your credit report. Learn more about federal student loan forgiveness programs.

Private student loans are a different beast, but some student loan lenders do offer repayment plans, deferment or forbearance. Call your servicer to find out what your options are.

What Are Student Loans Doing to Your Credit?

Building your credit score can seem like a daunting task. Knowing “Do student loans affect credit?” will help you get on the way to a good score.

To see how your student loans may be impacting your credit, you can get a free copy of your credit reports from each of the major credit bureaus annually at AnnualCreditReport.com. You can also see your free Experian credit score on Credit.com and get your FICO score for just $1. Your Experian score includes a free credit report card that shows where you stand in each of the five areas that affect your score. And your score and your report card are updated every two weeks to help you improve your credit consistently.