One of the biggest questions that come up when considering student loans is whether they appear on your credit report and can affect your credit score. The straightforward answer is yes.
Your student loans appear on your credit report and are factored into your credit rating, just like any other loan. How you manage your student loans can make an impact, so it's important to stay on top of the situation.
How Student Loans Can Affect Your Credit
Your student loan is considered to be an installment loan. Just like a car loan or mortgage payment, you make regular monthly payments until the debt is paid off. Credit reporting agencies will treat it as an installment loan on your credit report as a result.
Your credit report will reflect that you're a conscientious borrower who is good at financial management if you have student loan debt and make regular, on-time payments on it after graduation. This could make you look appealing when you need to borrow more money in the future.
On the other hand, failure to pay your student loans on time, letting your student loans fall into collections, or defaulting on student loans will also appear on your credit report, and this can negatively impact your credit score. It can affect your ability to get other loans in the future or receive good deals on financing.
When Do Student Loans Appear on Your Report?
Applying for federal student loans doesn’t show up on your credit report until you actually take out a loan. You may decide to shop around for private student loans; however, if you still need additional funds beyond federal student loans to pay for your college expenses.
Hard inquiries are reflected on your credit report, so make sure that a private lender only does a soft inquiry when giving you a rate quote. You can submit a full application after you've done some comparison shopping. It's worth noting, however, that most inquiries won't impact your score by more than about five points, so they shouldn't significantly affect your credit.
Your student loans will usually show on your credit report while you're still in college and still technically in deferment. But this doesn't typically have a dramatic effect on your ability to get non-educational loans because many lenders are more interested in your current monthly payment obligations than your actual loan balances. Your monthly payment obligations should be zero while you're still in school.
When Do Student Loans Have a Negative Impact?
As with any loan, making late payments can impact your credit. Your delinquency won't be reported to the three major credit bureaus until you're 90 days delinquent on a federal loan, so you have a little time to catch up if the situation is very temporary or if a missed payment was an oversight.
It's considered to be in default once your loan payment has been delinquent for 270 days. A student loan default could remain on your credit report for seven years. It can take years to reestablish good credit when your loan goes into default. The government can garnish your pay and withhold any federal income tax refund you might have counted on to get out of the situation.
There are also some federal benefits you might not be eligible for if you're in default. Talk to your servicer about rehabilitation options so you can reposition yourself to take advantage of programs and protections available to borrowers.
Private lenders aren't required to follow the same guidelines as federal student loan servicers, and they might not wait 90 days to report a missed payment. They might also have different guidelines for default. Each private lender is different, but it can begin pulling down your credit score as soon as it starts reporting missed or late payments.
You might also note a slight drop in your credit score when you pay your loan off. It no longer contributes to your overall credit picture. Your credit history will appear shorter unless you have other, older loans. It could affect your mix of credit as well if only revolving credit card accounts remain in your name.
What If You Can't Pay Your Student Loans?
It's not unusual to have problems repaying your loans once you're out of college and you've entered the workforce (or are trying to do so). You have options if you're having trouble making your loan payments at this time.
Consider income-driven repayment. You might be able to shift to a plan that allows you to make payments based on your income if you have qualifying student loans, including reducing your required monthly payment to zero for a while.
Each payment is considered paid "as agreed" when you're on income-driven repayment. Payments made while on one of these plans also "count" toward the 120 qualifying payments needed to obtain Public Service Loan Forgiveness.
Deferment or Forbearance
Depending on your personal situation, you may be eligible for temporary deferment or forbearance to lighten your student loan burden.
Both a loan forbearance and deferment will allow you to stop making payments for a certain amount of time or reduce your payments temporarily.
In most cases, interest will accrue during your period of deferment or forbearance (except in the case of certain forbearances, such as the one offered as a result of the COVID-19 emergency). This means your balance will increase and you’ll pay more over the life of your loan.A deferment or forbearance doesn’t hurt your credit score because it's considered “paid as agreed.”
Doublecheck the conditions of your deferment or forbearance so you understand when the situation ends and when you're expected to resume making payments.
Some private student lenders also offer forbearance programs, but they vary by lender and there are no uniform standards. Contact your lender as soon as possible if you're having trouble paying your private student loans to see what types of arrangements they have for borrowers facing hardship.
It can be confusing and it may look messy on your credit report if you took out multiple student loans during your college years. You may be more likely to miss a payment because your various loans have different payment due dates and amounts.
It may be helpful to use a direct consolidation loan for your federal student loans in this case so you only have to make one monthly payment. Direct loan consolidation might also extend your payment period, making your monthly obligation more affordable and easier to manage.
It's also possible to refinance your student loans. Refinancing makes use of a large private loan to pay off your smaller loans. You can refinance federal student loans using a private student loan, but you lose access to programs like income-driven repayment and federal loan forgiveness once you do.
Refinancing your federal student loans into private student loans may not be the best idea because you could lose certain protections. Borrowers who refinance their federal student loans into private student loans could miss out on the waiver of federal student loan payments and interest that's in effect until Aug. 31, 2022, due to the coronavirus pandemic.
Consider using direct loan consolidation for your federal loans and refinancing any private loans you have. Refinancing before you start missing payments can help you lower your interest rate if you have good credit. It can extend your loan term, and potentially reduce your monthly payment so it's more manageable.
The Department of Education extended the waiver of loan payments and interest on privately held Federal Family Education Loan (FFEL) borrowing. FFEL loans are no longer being issued, so this relief applies only to existing loan holders. Any payments made retroactively to March 13, 2020, when the pandemic crisis was declared, will be returned to loan holders.
Forgiven loans are typically treated as taxable income by the Internal Revenue Service. But they're tax free if they're forgiven between 2021 and 2025, thanks to the American Rescue Plan Act of 2021.
The Bottom Line
Both federal and private student loans are included in your credit report, so it's important to pay attention to them and make your payments on time and in full whenever possible.
The worst thing you can do is ignore your loans when you can't pay them. Missing payments will eventually catch up with you and negatively impact your credit score, affecting your ability to make better financial choices in the future. Contact your loan servicer or lender as soon as possible to review your options if you're experiencing economic hardship and struggling to make your payments.