Student loan debt is common in the United States. At present, over 40% of adults who have attended college used student loans to help pay for their education. 1 In 2021, 42.9 million Americans had student loan debt amounting to $1.59 trillion. 2
Student loans can affect your credit score in different ways, depending on your credit history and how well you manage your payments. If you have student loan debt, it’s important to make sure it’s helping and not hurting your credit.
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The main ways that student loans affect your credit
Student loans affect the calculation of your credit score in two main ways:
1. Your payment history
Your payment history is the most important factor contributing to your credit score, accounting for 35% of your final score in FICO’s models and 40%–41% in VantageScore’s. This means that late payments can seriously damage your credit score.
Conversely, paying your student loans can actually benefit your credit score in the long term if you make your payments consistently and on time.
2. The amount of debt you owe
Both FICO and VantageScore (the two major credit scoring models) consider the amount of debt you have.
When it comes to installment loans like student loans, the scoring models look at the amount you currently owe compared to the original amount you borrowed. 3 If you’ve paid off a higher percentage of your loan, your credit score will be higher than if you’re just starting out, and vice versa.
Student loans and your debt-to-income ratio
The size of your student loan (and your interest rate) also affects your debt-to-income ratio (DTI). Because your income doesn’t appear on your credit report, it can’t affect your credit score, but most lenders still consider your DTI ratio when deciding whether to give you a loan. 4
For instance, according to the Consumer Financial Protection Bureau, a debt-to-income ratio of 43% or lower is usually necessary to get a qualified home loan. 5 If you make significant student loan payments each month, you may struggle to get below this percentage.
Other ways that student loans affect your credit
Student loans can also affect your credit score in the following (more limited) ways:
- Credit age: The length of your credit history accounts for approximately 15% of your credit score in most major models. 6 If you already have an established history, taking out a new student loan will lower the average age of your accounts, which may cause a temporary drop in your credit score. However, as your loans age, they’ll start to contribute to your credit history, improving your score.
- Credit mix: The credit scoring models reward you for having a mix of both revolving credit accounts and installment loans. If you previously only had credit cards, then taking out a student loan will improve your credit mix (and consequently your score).
- New credit: When you apply for a student loan, your application may trigger a hard inquiry. If so, the hard inquiry will take a few points off your credit score. However, the effect will be temporary (lasting several months to one year), and the inquiry won’t stay on your credit report for more than two years. 7 Lenders may view too many hard inquiries as a sign of financial distress, but one or two isn’t something you need to worry about.
When student loans start affecting your credit score
Your student loans may affect your credit score in limited ways as soon as they show up on your credit report. This can happen at any point after you’ve gotten your loan—potentially right away, even if you’re still in school or you don’t currently need to make payments. 8
However, you won’t feel the full effects until your repayment period begins, at which point your loan servicer will begin reporting your payments to the credit bureaus. To find out when you need to start making payments (and when they’ll show up on your credit report), visit their website or contact them directly.
How paying off your students loans helps build credit
As mentioned, student loans can help you establish a rich credit history—as long as you keep paying them on time.
Each on-time student loan payment you make will get reported to the credit bureaus and demonstrate your reliability as a borrower. Over time, the length of your credit history will also increase, improving your credit score.
This is true whether your credit score is good or bad. If you have a history of making late payments or have other damaging entries on your credit report, making regular payments on your student loans is an effective way of fixing your credit.
Federal vs. private student loans: Do they have a different credit score impact?
There are two types of student loans:
- Federal student loans (issued by the US government)
- Private student loans (issued by private lenders)
In general, both have similar effects on your credit. However, federal student loans have several unique characteristics that make them easier to pay back, which helps your credit score:
- Flexible repayment options: The Department of Education offers several alternative repayment options that private student loan providers don’t always offer, such as income-based repayment. 9 You may even be able to qualify for partial loan forgiveness or a pause on your payments if you’re really struggling.
- Subsidization: Many federal student loans are subsidized, meaning they won’t start accruing interest until you’ve graduated. Private student loans, on the other hand, are rarely subsidized, meaning interest will start accruing as soon as you receive them.
- Loan rehabilitation: This is a federal program that gives you a fresh start if you’ve defaulted on your federal student loan. If you have a student loan in collections, the collection account will be removed from your credit report, and you’ll once again be eligible for alternative repayment plans and other benefits. 10
Credit reporting bureaus must remove federal and private student loan accounts from your credit report after seven years, even if you haven’t paid them back.
How to avoid defaulting on student loans
Defaulting on a loan means failing to pay it back for a long period. The US Department of Education considers a loan to be in default when your payments are 270 days overdue, but private lenders may have different criteria. 12
Defaulting on your student loans can have serious consequences. As mentioned, your loan servicer may garnish your wages or even sue you to reclaim their money, and because defaulting entails missing multiple payments, it will also seriously damage your credit score.
Ask your loan servicer about your options
The best way to protect your credit from damage due to default depends on whether you have private or federal student loans.
If you realize that you won’t be able to make a payment on your student loan, the first step is to contact your loan servicer. They’ll be able to tell you what your options are and help you find the best solution.
Your options may include:
- Loan consolidation: By taking out a debt consolidation loan and using it to pay off multiple student loans, you may be able to get a single loan with lower monthly payments. When considering this option, make sure to calculate the final repayment amount to find out whether you’ll end up paying more overall, which can easily happen if the loan has a longer term.
- Rehabilitation: This is only an option for federal student loans. To rehabilitate your loans, you need to follow an income-based payment plan for 10 months, after which your loan will once again be considered in good standing (i.e., not in default). Bear in mind that you can only apply for student loan rehabilitation once.
- Deferment: If you can prove economic hardship, such as the loss of your job, you may be able to defer your payments until your circumstances improve (e.g., until you get a new job).
- Bankruptcy: As a final resort, you may be able to file for bankruptcy. Note that federal student loans are much harder to discharge in bankruptcy than other types of debt (including private student loans). To discharge them, you have to prove that paying them would constitute an “undue hardship.” In many courts, one of the criteria for this is that repayment would make you unable to afford the basic necessities of life. 13
Student loans can be a starting point for establishing a strong credit history. All you need to do is keep making your payments and reach out to your loan servicer as soon as possible if you have trouble paying them.