Student Loans and Their Impact on Credit Scores

Federal and private loans can help fund a student's college career, but experts note that being negligent in paying these loans back could yield negative consequences for someone's credit score.

We sat down with one of these experts to discuss bankruptcy and the dangers it poses to credit. John Heath is the directing attorney for the credit repair consumer service Lexington Law Firm. This company works with consumers to find easy ways to fix their credit scores and improve their financial picture. Heath is an expert on several topics; this time, we chatted with him about student loans and their impact on credit scores.

Q: Do student loans show up on a credit report?

A: Yes. If the student loan lender reports to one or more of the major credit bureaus (Equifax, Experian and TransUnion), student loans can be reported on your credit report.

Q: Do credit scores play a factor in getting a private or federal student loan?

A: With federal student loans, the answer is no. Federal student loan awards are generally based on financial need. Your income or your parents' income is generally taken into account in order to determine whether you will receive a federal student loan and the amount of the loan.

With private loans, the answer is yes. Private loan companies will assess the risk involved with granting a student loan. While the private loan company realizes that most students will not have a substantial credit history, they will rely in part on your credit score in order to make an award. Private loan companies will generally not award a student loan if your credit score is under 650.

Q: Will looking around for interest impact a credit score? (i.e. hard inquiry)

A: If you are looking for the best rate within a focused period (30 days or less), it will most likely not have a big effect on your credit score. It is best to finish your rate shopping within this short, focused amount of time.

Q: Is the rise in tuition affecting how many students apply for educational loans?

A: A rise in tuition will affect how students finance their education. When tuition and books become more expensive, students look to loans to augment savings and scholarships.

Q: Will not paying back a student loan hurt someone's credit score?

A: Yes. If you fail to repay your student loans, your credit score will be hurt. Approximately 35 percent of your credit score is based upon your payment history.

Also, you could be subject to legal action (including judgments) that will further affect your score. This can also affect your ability to be employed by the government or in certain professions such as being an attorney, for example.

Q: Can consumers be sent to collections for not paying student loans? How does this affect a credit score?

A: Yes. Loan lenders can collect from you if you fail to repay your student loans. You could be subject to legal action (including judgments). Both will negatively affect your credit score.

Q: Will paying back student loans while enrolled in college help improve a credit score?

A: Repaying your student loans in a timely manner (even while still enrolled in college) will help maintain or improve your credit score.

Q: Is student loan debt factored into someone's credit utilization ratio or is it different from other loans?

A: Yes, but it is a very small number of points. Student loans are installment loans, meaning you take a certain amount out and make payments on it. Whereas, credit cards are revolving debt, meaning that you are assigned a credit limit and can spend up to that limit. Your credit score is far more impacted by how you utilize revolving credit.

Q: Are you allowed to refinance student loans? If so, will this impact a credit score?

A: Yes, you can refinance your student loans. It generally will not affect your credit score if you refinance.