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Published: Jul 03, 2024 8 min read

If you’re one of the millions of Americans who have student loan debt, there’s a strong chance that student loans were your first brush with credit.

With the price of tuition rising exponentially, a majority of bachelor's degree recipients rely on loans to fill the gap when scholarships and grants are not enough. But loans can have ripple effects that last long after your college years end.

How do student loans help and how can they hurt your credit? Here’s a breakdown.

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How student loans can help you build credit

Student loans are a type of installment loan, similar to mortgages, auto loans and personal loans. These types of loans let you borrow a fixed amount in one lump sum, and then you repay it on a monthly basis until it’s paid off.

Like other types of credit accounts, your student loans and the payments you make are reported to the major credit bureaus — Experian, Equifax and TransUnion — which can help you build a credit history.

And, because student loans have more lenient credit requirements than other installment loans — in fact, federal loans do not even require a credit check — they are often a convenient way to start building a good credit history.

These loans can help three important aspects of your credit score: payment history, credit mix and credit length.

Payment history

The most significant way student loans can boost your score is by helping you establish a positive payment history. That accounts for 35% of your FICO credit score, so if you pay your loans like clockwork, you will see your credit score improve substantially in time.

Length of credit history

Length of credit, or credit age, measures how long you’ve had credit accounts and makes up 15% of your FICO score. In the case of student loans, your credit length is established from the moment the loan is first listed on your credit report, even if you’re not paying it. That's why they can potentially be helpful for younger students, who may be years away from a mortgage or who are trying to avoid credit card debt.

Credit mix

Finally, credit mix refers to the different types of credit you have under your name, and it accounts for 10% of your credit score. If you have student loans and a credit card, for example, this could help you improve your credit, since you’d have two types of loans.

However, note that your payment history is much more important than your credit mix, so avoid having an excessive number of credit accounts if it could make managing debt challenging.

How student loans can hurt your credit

Student loans can also impact your credit in negative ways. For one, private loan servicers will perform a credit check, which will result in a hard inquiry and bring down your score (slightly). But where these loans could really hurt your credit is if you were to miss payments or default on your loan.

Late payments and delinquencies

Just as on-time payments can bolster your credit, making a late payment or missing a payment can sink it.

If you have federal loans, there’s no need to worry if you miss your due date by a couple of weeks — late payments on these loans are only reported after 90 days. With private loans, however, a late payment can be reported after 30 days.

Note that once it’s reported, the mark will remain on your credit file for seven years. Same thing if you default on the loan.

In general, having negative marks on your report from missing payments can affect your chances of getting approved for new credit. It’ll also increase your interest rates if you are approved for other loans or credit cards. Additionally, if you default on your loans, they could be sent to collections, which can be even more damaging to your score.

Increased debt-to-income ratio

Student loans can affect your debt-to-income ratio, making it harder for you to qualify for other loans, such as a mortgage.

Your debt-to-income ratio is calculated by adding all of your monthly debt payments and dividing the total by your monthly gross income.

Lenders, particularly those in the mortgage industry, prefer borrowers who have a debt-to-income ratio of 43% or less. If you have a debt-to-income that’s higher than that, you may still get the loan, but you likely won’t be able to secure the best terms or interest rates.

Do student loans affect your credit while in school?

While you’re not required to make any payments on federal student loans until after you graduate, both federal and private student loans will show up on your credit report as soon as you’re approved.

The only exception to this rule are parent PLUS loans, which will show up on one of your parent’s credit reports since the loans — even though they pay for your education — were taken under your parent’s name. (Also keep in mind that your student loan could show up on your parent’s credit reports if they’re your co-signer on a private loan.)

But just appearing on your credit report isn’t necessarily bad. When you’re in school, federal loans are automatically put in a deferred payment status. Rod Griffin, senior director of public education and advocacy at credit bureau Experian, says that this means they’re in a “dormant” state and “have little-to-no effect” on a student loan borrower’s credit score. So they’ll be on your official credit report, but they won’t lower or raise your credit score because they aren’t in active repayment.

What do to do if you can’t make your student loan payments

If you can’t make payments on your federal loans, and are running the risk of damaging your credit, you should consider applying for an income-driven repayment plan.

These plans can set monthly payments according to your income and family size, and might substantially reduce what you pay every month. In fact, under the guidelines of the new income-driven repayment plan called SAVE, payments should be no more than 10% of the borrower’s discretionary income. For some borrowers, payments have gone down to $0.

If you have private loans, you could look into loan consolidation or whether you can refinance to get a lower interest rate and/or lower monthly payments. For federal borrowers, refinancing is not advised because you lose eligibility for federal forbearance, income-based repayment and financial hardship programs.

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How do Student Loans Affect Your Credit Score FAQs

Do federal student loans affect your credit?

Federal student loans, just like private loans, will affect your credit. However, this can be a positive. Student loans report your payment history to all three credit bureaus, which can help you build a great credit history — provided you make payments on time. Missing payments or defaulting on your loans, on the other hand, can cause your credit score to plummet, making it harder to qualify for new credit.

Do deferred student loans affect your credit score?

If your lender agrees to defer your loans or place them in forbearance, you can stop making payments and it will not impact your credit score. The loans will still be reflected in your credit report; however, the fact that you’re not making payments will not count against you.

Can you file bankruptcy on student loans?

Student loans can be discharged during a bankruptcy proceeding, but it does take some extra steps. In addition to the bankruptcy filing, you would have to file a separate action called an adversary proceeding. Through this action, you would aim to prove to the court that repayment of the loans would represent “undue hardship” for you and any dependents you might have.