How Student Loans Affect Your Credit
Will borrowing for school hurt your score?
While student loans can help you finance your college education, they tend to stay with you long after your days on campus are done. Beyond monthly payments that impact your budget, student loans affect your credit score, too, just as all loans do. Lenders use your credit score as a measure of how responsible you've been as a borrower, and that can determine whether you're approved to borrow and at what interest rates. So depending on your student loan borrowing behavior, they could either help or hurt your score.
To make sure you don't damage your credit, it's important to understand the effect your educational debt can have—both when you first apply for loans and over time as you pay them back.
Student Loans & Your Credit Score
On-time payments can improve your credit report
A mix of debts can boost your score
Late payments or defaults can do major damage
Too many hard inquiries on your credit report can hurt you
Signing up for a new student loan could lower your score
The positives are that payment history is a key factor that determines your credit score, and if you make student loan payments on time, you can develop a positive payment record. Additionally, having a mix of different kinds of debt can raise your score. Student loans are installment loans and this means they differ from revolving debt, such as credit cards. Adding them to your credit history can also help your score.
On the contrary, applying for a private student loan or federal PLUS loan does a hard inquiry on your credit and that can lower your score. And if you miss one or more student loan payments or stop paying back your loan, your credit score will fall.
Applying for the Loan
Some federal loans, including direct subsidized loans and direct unsubsidized loans, are available regardless of your credit history. To qualify for them, you'll need to complete the FAFSA and provide financial details, but you won't have to undergo a credit check.
Federal PLUS loans, however, are generally unavailable to borrowers with bad credit. If you apply for these loans as a parent or graduate student, you can expect an inquiry on your credit report. And private student loan lenders also check your credit.
Too many inquiries in a short time could cause your credit score to go down. If you're applying for several student loans, including PLUS loans and private loans, multiple inquiries could end up on your credit report and have a negative impact.
If you’re shopping for a student loan, consider doing it in a focused period of time (like 30 days) and then making a decision within a timely manner. FICO says shopping like this should have little to no impact on your credit score.
The good news is many private student loan lenders allow you to get preapproved and find out your interest rate before going through a full credit check. This means you can comparison shop for the right loan without doing a hard credit pull every time. It's only once you officially apply for the loan that your score will be impacted.
Taking on Student Loan Debt
Credit scoring models typically take the length of your credit history into account, so applying for any new debt—including student loans—can adversely affect your score.
Of course, your student loan will eventually become an old account over time. If it's the first debt you've applied for, it may actually help you start developing the long borrowing history lenders look for.
Borrowing a large sum to fund your education can also hurt your score because credit scoring formulas look at how much debt you owe overall.
Amounts owed is a key factor in determining your credit score. Credit card balances largely influence this component of your credit score, but installment loans like student loans play a role, too. Credit scores consider how much you owe compared to the amount you initially borrowed, so when you first take out a loan, you’ll have a high loan balance. But as you pay down the debt, you’ll show you can manage taking on debt and paying it off, which is good for your credit score.
For example, FICO found that consumers between the ages of 30 and 34 who paid off their student loans had an average credit score of 697, which is considered good. Those in the same age group with current student loan balances had an average credit score of 653, which is considered fair. FICO also found that about 7% of consumers with $50,000 or more in student loan debt had a credit score of 800 or higher, which is considered excellent. Regardless, FICO scores look at revolving credit more so than installment loans when it comes to credit utilization.
Repaying Student Loan Debt
The single biggest factor that determines how student loans affect credit is whether you make your payments on time.
As soon as you miss a payment on a federal student loan, you're classified as delinquent. If you have a federal student loan, your missed payment will be reported to the three major credit reporting agencies once you're at least 90 days late. Private student loan lenders may report missed payments sooner.
A single payment that's 30 days late could potentially reduce your credit score by more than 80 points, according to FICO. And the later you are in paying your monthly bill, the bigger the drop. Late student loan payments can stay on your credit report for seven years and have a long-term negative impact.
Defaulting on your loan can have even worse consequences. You're considered to be in default on direct loans or FFEL loans one you’ve gone 270 days or more without making a payment. And if you have a Perkins loan or private student loan, your loan servicer could classify you as defaulting as soon as you miss a payment.
The U.S. Department of Education warns that defaulting can damage your credit in a way that may take years to recover from. And while you can rehabilitate defaulted federal student loans and have the record of the default removed from your credit history, all late payments leading up to it will still show on your credit report for seven years.
The Bottom Line
There's no one answer as to how student loans affect credit since it depends on your borrowing history and how responsible you are in repaying that debt. In general, though, if you make all your loan payments on time and in full, your student loans should have a long-term positive impact that shows lenders that you can be responsible with debt.
Federal Student Aid. "Federal Versus Private Student Loans." Accessed Feb. 21, 2020.
FICO. "FICO Research: Average US Student Loan Debt Doubled in 10 Years." Accessed Feb. 21, 2020.
FICO. "Is Growing Student Loan Debt Impacting FICO Scores?" Accessed Feb. 21, 2020.
Federal Student Aid. "Student Loan Delinquency and Default." Accessed Feb. 21, 2020.
myFICO. "How Credit Actions Impact FICO Scores." Accessed Feb. 21, 2020.
Federal Student Aid. "Getting Out of Default." Accessed Feb. 21, 2020.