Article originally published January 30th, 2017. Updated October 26th, 2018.
We’re going to go out on a limb here and guess that you probably have outstanding student loans. According to data from the Federal Reserve Bank of New York, over 44.2 million people in the U.S. have student loan debt. And, as of the this year, outstanding student loan debt clocked in at nearly $1.5 trillion with federal loans accounting for $1.26 trillion of that sum.
While there’s not a lot of good news out there concerning student loans, there is a possible upside to having them. Student loans can be really good for young consumers’ credit scores— and help them qualify for other lines of credit later on. Of course, on the flip side, not paying your student loans can hurt your score.
Let’s break it down.
How Can Student Loans Help My Credit?
Credit scores are calculated based on certain aspects of a consumer’s credit report including payment history, debt levels, the age of credit, and debt diversity.
Having a well-managed student loan can have a positive impact on credit scores if you handle them correctly. Following the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, young consumers had to prove financial ability to repay debts in order to get a credit card.
Having student loans establishes a credit history, which is helpful for those who can’t access revolving credit, and for those with credit cards, a student loan improves the diversity of their credit profiles, since it’s an installment loan.
Borrowers can look at student loans as an opportunity to strengthen payment history — the most important aspect of credit scores. Late payments on any debt will hurt credit scores (more on this in a moment) but making on-time monthly payments during the student loan repayment process will prove to be an outstanding asset on a credit report.
The amount owed in student loans bears little impact on a borrower’s credit scores — it really comes down to the payment history, which is why it’s important to take on a manageable debt load and take advantage of loan repayment assistance when available.
If you want 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. Also, you can look at your free credit report snapshot on Credit.com.
How Can Student Loans Hurt My Credit?
Any missed payment on a student loan can do big damage to your credit — a first missed payment, for instance, can cause a good credit score to fall up to 100 points. And the cumulative effects could be much worse if you continue to miss payments and go into default.
Plus, like other forms of credit, applying for a new private student loan account (and some federal student loan programs) results in a hard inquiry on one’s credit report, which can shave a few points off credit scores. A new account appears separately from the inquiry on a credit report, also resulting in a slightly negative, short-term impact on credit scores.
The good news is that student loan inquiries, as with mortgages and auto loans, will be “deduplicated” on credit reports, allowing multiple inquiries within a small period of time, typically between 14 and 45 days, depending on the credit scoring model. This allows consumers to shop for the best deal among private student lenders without unnecessarily hurting their credit scores.
How Can I Keep Student Loans From Hurting My Credit?
There are programs in place that can help beleaguered student loan borrowers make good on their payments — or defer them until they are in a better place financially. If you’re struggling to make your student loan payments, call your servicer to find out what options may be available to you.
Federal student loans, for instance, are eligible for forbearance, deferment, and income-based repayment plans — and 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 borrowers return to current repayment status and have the default axed from their credit report. You can learn more about federal student loan forgiveness programs.
Private student loans are a bit of a different beast, but some lenders do offer repayment plans, deferment or forbearance — again, call your servicer to find out what your options are.
Can Student Loans Appear on My Credit Report While I’m in School?
Yes. Per credit bureau Experian’s website, “when you accept a student loan, you are opening an account with the lender, and they may begin reporting the account at any time.” When it comes to federal student loans, you’re generally expected to start making payments six months after you graduate.
Private student loans may require payment right way. But, in either case, until your loan enters repayment status, your credit won’t be penalized for missed payments.
Income-Based Student Loan Repayment Options
When you opt for income-based repayment options for your student loans, you are essentially paying as you earn. It is a better way to get a hold on your debt and help lower your monthly student loan payments, so the repayment process is a bit more manageable.
If you find that you are struggling to make your monthly payments or are left with less than you need for your other living expenses, you will also soon find that your credit will suffer and be significantly impacted by missing or late payments.
When you have higher student loans, you should expect higher monthly payments, and if you have a lower income, this is near impossible to do when you have a standard repayment schedule.
An income-based repayment plan takes into consideration the percentage of your discretionary income and tailors the monthly payments to these calculations. The payments will be suited for your individual income, your overall cost of living, and the needs of yourself and your family.
Remember, while you are lowering your monthly payments, so repayment is more manageable and won’t hurt your credit because you won’t have to worry about your old high monthly payments, you are still going to pay more in interest over the course of the repayment terms.