Do student loans affect credit scores?

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

It’s easy to see why many believe student loans are nothing but bad news: overall student loan debt in the United States is now more than 1.64 trillion, and 84 percent of borrowers say student loans are what will prevent them from being able to retire.

But when managed well, student loans can actually help young graduates build credit or improve their existing credit scores. The key is to make sure you’re entering into your student loans equipped with all the information you need to avoid potentially credit-damaging mistakes.

Here are some things we think you should know about student loans and how they can help or hurt your credit score.

Used correctly, student loans can be a powerful credit-building tool. Here are three positive ways you can leverage your student loans.

Establishing a positive payment history

Typically, student loan payments aren’t due until several months after a student has graduated. However, many loan providers allow students to make elective payments toward their loans before the deferment period has ended.

If you’re able to, making small voluntary payments toward your loans while you’re still in school can help you establish or improve your credit. Though there’s no active due date on your loans yet, these elective payments still “count” as positive, on-time payments and will be reflected in your credit history, assuming your student loan servicer reports to a credit bureau.

Since payment history is the most important factor in determining your credit score, these small payments toward your student loans can have a big impact on how quickly you establish or raise your credit score.

Lengthening your credit history

Many students avoid opening credit accounts during college, a decision that is in many ways a smart move, since it can stop you from overspending and falling into unmanageable debt. But when it comes time to buy a car or rent an apartment, having no credit is as unhelpful as having bad credit.

Fifteen percent of your credit score is determined by the average length of your credit accounts, so even after you’ve started building credit, it will take a while for your account lengths to start contributing positively to your score.

If you take out student loans to get your bachelor’s degree, you’ll have four years of account history already on the record by the time you graduate, which will help raise the average length of all your credit accounts.

Diversifying your credit

Another factor that impacts your score is how varied your credit accounts are. Having one credit card, one student loan and one mortgage is preferable to only having three credit cards, for example. Spreading your credit across different types of accounts will diversify your credit—a factor that determines 10 percent of your credit score.

Of course, like any debt, student loans have the potential to be harmful. If your student loans become overwhelming, missed payments or a default on your loans can significantly damage your credit score.

Below we’ve listed the three major ways that student loans can harm your credit—and how to avoid or fix them.

Missed or late payments

Like any credit account, student loans incur fees and detrimental marks when a borrower misses or is late on a monthly payment. Especially since student loan payments tend to be due in the months after graduation, when many graduates are searching for jobs, relocating and adjusting to postgraduate life, those monthly payments can be a struggle for even those with an otherwise spotless payment history.

What to do: If you think you might be unable to make a student loan payment, contact your loan provider right away. You can put your loans into deferment or forbearance, which are two types of postponement options that should have no negative impact on your credit.

However, any late or missed payments from before you postponed your loans will most likely hurt your score, so it’s important to act quickly.

Defaulted loans

If you’ve missed a payment by enough time—typically 270 days for federal loans and 120 days for private loans—you will be in default and can be sued for the entire amount you owe. The IRS can also seize your tax refunds and the government or private lender can garnish up to 15 percent of your wages as repayment until the loan is paid.

Defaulting on a loan can also add costs to the amount originally borrowed. Lenders can add collection costs, and if the borrower winds up in court, legal fees will add to the overall cost of a defaulted loan.

A default can remain on your credit report for up to seven years from the date of your first missed payment.

What to do: The best way to deal with a defaulted loan is to avoid it completely by putting your loans into deferment or forbearance before your missed payments get out of hand.

If your loan in default is a federal loan, you may be able to rehabilitate it by contacting the loan provider to negotiate a revised payment plan, and then making nine on-time payments over a period of 10 months.

High debt-to-income (DTI) ratio

Even if you make your payments on time and in full, student loans can be potentially harmful if your monthly payment is too high compared to your monthly income. For example, if your monthly loan payment is $800 and you only make $1600 per month, that puts your DTI ratio at 50 percent.

Though your DTI ratio isn’t reflected in your credit score, it’s something lenders take into consideration when evaluating you as a borrowing candidate. Having a high debt-to-income ratio also increases the likelihood that you will have missed or late payments, which do harm your credit score directly.

What to do: Many student loan providers allow borrowers to adjust their payment schedules based on their income. If you contact your loan provider, you may be able to lower your monthly payments to a set percentage of your monthly paycheck. Not only will this make budgeting easier, but it may also make it easier for you to get approved for other types of credit, like a mortgage.

Refinancing your student loans shouldn’t impact your credit in a significant way—assuming you do it correctly. If you’re smart and avoid some common pitfalls, refinancing your student loan can be a great decision that saves you money.

Here’s how to avoid hurting your credit while refinancing a student loan:

Only apply for one refinancing loan

You should absolutely shop around for the best refinancing offer, but when it comes to submitting a full application, hold off until you’re certain you’ve found the right lender. Like most credit applications, approval for a refinancing loan requires a hard credit check, which will ding your credit slightly.

Many lenders will give you the option to prequalify or get a loan offer online for free. Typically, these offers only require soft credit pulls, which don’t impact your credit at all, and collecting offers from multiple lenders will help you find the best refinancing deal.

Keep making loan payments until your refinanced loan is finalized

Though it may feel pointless to keep making payments on your original loan if you feel confident your refinance will be approved, it’s essential that you keep making those payments until the refinance process is fully completed. Halting payments on your original loan before your refinanced loan is active will result in late or missed payments being recorded on your credit report.

Make payments on your refinanced loan on time and in full

Falling behind on your refinanced loan will have the same consequences as falling behind on your original loan, so it’s just as important to stay up on your payments after refinancing. Many refinanced loan providers also offer options like deferment, forbearance, unemployment protection and more—but you must take advantage of these options before missing a payment in order to avoid harming your credit.

When it comes to federal student loans, like Stafford or Perkins loans, your credit score usually won’t be a factor. However, if you are in default on a student loan already, you won’t be able to apply for federal student aid until you’ve paid it off.

Some expenses associated with your education won’t be covered by a federal loan, like a personal computer or internet services. If you want to apply for a private student loan, then your credit score will be a factor in determining your approval as well as your interest rates and loan terms.

The answer to this is both yes and no. Defaulted student loans will generally fall off from your credit report after seven years from the final payment date. However, during the seven years that you are in default, your credit score will likely be negatively impacted and you'll have difficulty securing credit approvals. Plus, if your defaulted loan was a federal loan, you’ll be unable to apply for any other federal student aid.

1. Pay your student loans on time and in full

As long as you can afford it, make absolutely certain that nothing gets in the way of your loan payments. If you have a hard time remembering to pay them, consider enrolling in your provider’s auto-pay option.

2. Communicate with your loan provider

Options like deferment and forbearance can save you from hundreds of points’ worth of damage to your credit score—but only if you activate them before you miss a loan payment. Establishing open communication with your loan provider early on will make it easier to request the help you need if you wind up struggling to make payments.

3. Pay extra whenever you can

If you’re fortunate enough to be able to afford to make extra payments on your student loans, do so. Extra payments can help improve your credit and shorten the length of time it takes to pay off your loan, which will save you interest.

Like all types of credit, there’s good student debt and bad student debt. Taking on student loans can open a world of educational opportunities and help you improve your credit, so long as you approach them the right way.

If you’re still unsure whether your student loans are dragging down your credit, you can request a free credit report summary and consultation to get a personalized overview of your credit factors. The more you know about your debt, the more control you’ll have over it.

Reviewed by Brittany Sifontes, Attorney at Lexington Law Firm. Written by Lexington Law.

Prior to joining Lexington, Brittany practiced a mix of criminal law and family law. Brittany began her legal career at the Maricopa County Public Defender’s Office, and then moved into private practice. Brittany represented clients with charges ranging from drug sales, to sexual related offenses, to homicides. Brittany appeared in several hundred criminal court hearings, including felony and misdemeanor trials, evidentiary hearings, and pretrial hearings. In addition to criminal cases, Brittany also represented persons and families in a variety of family court matters including dissolution of marriage, legal separation, child support, paternity, parenting time, legal decision-making (formerly “custody”), spousal maintenance, modifications and enforcement of existing orders, relocation, and orders of protection. As a result, Brittany has extensive courtroom experience. Brittany attended the University of Colorado at Boulder for her undergraduate degree and attended Arizona Summit Law School for her law degree. At Arizona Summit Law school, Brittany graduated Summa Cum Laude and ranked 11th in her graduating class.

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