Student Loans and Your Credit Score

With total student loan debt reaching a staggering $1.56 trillion in 2020, one can’t help but wonder how it affects individual credit scores. Like other types of installment loans, student loans have direct ties to the credit score. Student loans and your credit score go hand in hand, and it’s a relationship you have plenty of control over.

But what kind of relationship is it? Can student loans have only a positive impact on your score, or can they bring it down as well? How about the other way around – can credit score impact your student loans in any way? You will find answers to all those questions right here.

The Relationship Between Student Loans and Credit Score

First of all, you need to know what comprises your credit score in order to understand the effect that student loans have on it.

The largest portion of your score is payment history. It makes up 35% of your total score and contains information about how you paid your accounts over the length of your credit. Payment history serves as evidence of the repayment of your debt.

Most installment loans (mortgage loans, car loans) usually list the monthly payment as part of the account. The credit report shows if you made the installment loan on time or not, which then affects your score.

Since student loans fall under installment loans, they show up on your payment history. In other words, student loans fall under the category of loans that affect 35% of your total score.

Does Paying Your Loans Build Credit?

As is the case with all other loans, paying student loans does build credit over time. It’s a minuscule contribution to your overall score. However, since student loans take a fairly long amount of time to pay off, they can accumulate quite a bit of good credit. So long as you pay the loans in time, that is.

We mentioned that payment history represents 35% of your credit score. Paying your student loan on time will help with your payment history.

But there are also other factors that make your score what it is. Credit mix is one of the more important factors, as well. It’s responsible for 10% of the total score, and it represents a good and healthy mix of different lines of credit.

What this means is that the more different (unique) lines of credit you have, the better your score will be. Adding student loans to the mix will improve the variety of your credit profile. And when the credit profile is sufficiently varied, your score goes up. It’s yet another calculation where your student loan makes your score better.

Also, did you know that the length of your credit history plays an important role in your total score? Not to be confused with credit age, which is the average of how long all your accounts have been open.

So long as an account remains open, it contributes to your total length of credit history. And since student loans usually come with 10-year repayment plans, your score is bound to see some benefit that way.

The length of credit history is responsible for 10% of your credit score, just like the credit mix. The longer your student loan is open and active, the more of a positive impact it will have on the score. Of course, it’s still crucial to make payments on time and avoid delinquency.

A great thing about positive items on your credit report is that they stay there for ten years after being closed. Then they’re removed. In other words, if you’ve paid student loans on time throughout the 10-year repayment plan, it’s going to have an amazing effect on your credit score in years to come.

How Can Student Loans Hurt Credit?

Obviously, student loans carry many great benefits to your score. But can student loans hurt your credit in any way? The answer is yes.

Just like paying your student loans on time makes for reliable payment history, so does skipping on payments make you look bad. Lenders are less likely to give you money if you have a poor track record of paying it back, and student loans do show up in your payment history. If you don’t fix the missed payment soon, the worse the consequences are going to be for your score. Naturally, defaulting on the student loan will do heavy damage to your score.

Depending on the type of student loan, you have a different timeframe available to you to fix the situation before the lender reports it to the three major credit bureaus (Experian, Equifax, and TransUnion). In case of a federal loan, servicers will wait for 90 days before reporting to bureaus. If you have taken out a private loan, lenders usually wait no longer than 30 days to report the situations to credit bureaus.
Another way that you can lose score is by simply applying for a private loan. Unlike federal lenders, the private ones will perform a hard pull on your credit reports. Hard inquiries do show up on reports as negative items.

Of course, borrowing a lot of money will increase your debt-to-income ratio, causing your score to go down.

If your federal loan is serviced by Great Lakes Higher Education Corp. you might have noticed a decrease in credit score. The reason for that is unfounded reporting to credit bureaus during the automatic six-month forbearance that began in March 2020. It appears that the erroneous code is behind this issue.

Great Lakes has stated that they’re working together with the three major credit bureaus on fixing the issue with reports.

Does Credit Score Affect New Loans?

Your credit score has no influence over your eligibility for federal loans unless they’re federal direct PLUS loans.

However, private loans do require good credit from at least one borrower (undergraduate students usually need a co-signer). The better the score, the lower the interest rate is going to be.

How Does Refinancing Student Loans Affect My Score?

Refinancing student loans means taking your previous private and/or federal loans and transforming them into a new private loan.

Since private loans and their interest rates depend on credit score, the lender will do a hard check of your credit. Hard inquiries reduce your credit (usually by five points). The more hard pulls you perform, the lower your score will go.

But if you make multiple hard checks of the same kind within a pre-determined time period, all those hard checks will appear as only one item on your credit report. Make sure to submit all your applications within two weeks to minimize the damage to your score.

If You Cannot Pay Your Student Loans

At White, Jacobs and Associates, we have incredible credit analysts who can help you consolidate or refinance any student loans you might have. If you have trouble repaying your student loans, don’t hesitate to contact us. We provide no-cost counseling, so give us a call and tell us all about your student debt.