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Student loans usually help students build a positive credit history, provided they are paid on time. But one borrower is convinced that the way his student loans have been reported has caused his credit scores to drop. “Jim” writes:

I hope you can help me understand why my credit report and credit score are being affected by my student loan disbursements. Each disbursement has its own account number from the lender, like Sallie Mae, but if I contact Sallie Mae, I only have one account number for the entire student loan. Why are the disbursements treated as individual accounts and not added to only one account?

I have monitored my credit scores since my first disbursement was made back in 2006. When a disbursement is made, they report it to the three credit reporting agencies as a new account, but the student loan lenders only have one account on file for the full amount of the loan.

Jim’s upset because he has been monitoring his credit scores, and each year his scores have dropped. The student loans are the only new activity on his reports, he insists. (Wondering how student loans may be impacting your credit? Check out Credit.com’s truly free Credit Report Card for an easy to understand overview of your credit, along with your credit scores.)

I’ve heard this type of complaint before, so I decided to take a closer look. First, it’s important to understand how these loans are given out, or “disbursed.” A student may get one federal loan for the year, but it will usually be doled out in two or more disbursements. “Federal law requires at least two disbursements,” says Mark Kantrowitz, publisher of Finaid.org. In most cases, one disbursement will be made in the fall when the school year starts, and the other in the spring. “Colleges can get a waiver of the multiple disbursements rule if they have a default rate under 10%,” he adds. “Colleges would like to do monthly disbursements to avoid students running out of money mid-semester, but current regulations don’t permit that for federal loans, so typically students get one disbursement per semester.”

Sallie Mae spokesperson Patricia Nash Christel told me that individual disbursements are still considered part of the same loan. “Sallie Mae customers have a unique customer ID. Each loan could have more than one disbursement, but they would still be only considered one loan and reported as one loan.”

She also noted that it is possible that some undergraduates can have both federal and private loans. Jim says he has federal loans and a private education loan through his credit union.

How Many Loan Are We Talking About?

While there are plenty of statistics about student loan debt, it is difficult to track down the average number of student loans a borrower holds. Kantrowitz ballparked it at 6-8 loans for a Bachelor’s degree recipient, though the figure could be as high as “16 for 4 years, 20 for 5 years.” He notes that after graduation, many borrowers consolidate their loans with one federal loan and one private loan, which would bring the number of open accounts down to two.

If these disbursements are treated as separate loans, can that hurt your credit scores — even if the loans are paid on time?

Barry Paperno, a credit scoring expert told me that his colleagues in the credit reporting industry are “well acquainted with the practice this reader describes (and) acknowledged that they get frequent calls from unhappy consumers when they see the multitude of accounts reporting.”

He adds: “Regardless of the reason why lenders report this way, the reality is these are all considered separate loans, with different open dates, by the scoring models.” That may not always be a bad thing, however:

Fortunately, for student loan borrowers, installment balances don’t have the same scoring impact as revolving balances do in utilization calculations. But a few of the areas where student loan borrowers can be negatively impacted by this manner of reporting are:

1. When newly reported, each disbursement/loan is considered a new loan by the scoring formula, which can mean a slight reduction in score due to the presence of a “new account” each time; and

2. With each new disbursement appearing as a new loan, the borrower’s ‘average age of accounts’ can remain low and result in a lower score than if the average age were higher.

Kantrowitz is doubtful that the way these loans are typically reported creates a problem. “Multiple disbursements of a single loan should not affect the credit score, aside from the increases in debt outstanding. The number of disbursements does not normally affect credit scores. Perhaps if they were recorded as separate loans, but that does not happen with experienced lenders,” he insists.

In the meantime, Jim still believes that his student loans are not reported accurately, and that his credit scores have suffered as a consequence. It’s unclear exactly how serious of a problem this is for most borrowers, though.

One this is clear: Payment history is still the main factor that will determine how a student loan impacts one’s credit history. So no matter how many loans students have, they need to make sure they are keeping track of all their loans and paying them on time.

What do you think? How have your student loans impacted your credit scores? Share your story in the comments below.

Image: Tulane Public Relations, via Flickr

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