If you’re one of the roughly 44 million 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 at public four-year institutions rising by 64% in the past two decades after adjusting for inflation, 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.
Experts say student loans can have consequences for your credit down the line if you're not diligent about paying them off. On the other hand, they can be an opportunity for young people to start building credit history.
How do student loans help and how can they hurt? Here’s a breakdown.
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 for the loan.
The only exception to this rule is 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.
Of course, even if the loans don’t impact your credit score during your college years, not making payments at all while you’re enrolled can have long-lasting effects on your finances, as interest will accrue on federal unsubsidized loans and private loans. Eventually, that interest capitalizes and becomes part of your principal balance.
Can student loans help me build credit?
Student loans are a type of installment debt, meaning that you borrow a fixed loan amount in one lump sum, and then you typically repay it on a monthly basis for a specified number of years.
So paying your student loans on time can help you work toward a good credit score the same way paying other installment loans — like a mortgage, a personal loan or an auto loan — would.
Paying your loans diligently helps three aspects of your credit: payment history, credit mix and credit length.
The biggest 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 could see your credit score improve substantially.
Length of credit measures how long you’ve had those accounts and makes up 15% of your FICO score. In the case of student loans, your credit length is established from the minute you’re approved for the loan, 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.
Finally, credit mix is 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. Just note that you don’t want to have an excessive number of credit accounts.
Can student loans hurt my credit score?
Just as on-time payments can bolster your credit, making a late payment or missing a payment can sink it. But don't freak out if you happen to miss a single payment by a couple of weeks. As long as you pay it and catch up before 90 days, it likely won't be reported to the credit bureaus, assuming you have federal loans. With private loans, a late payment can be reported after 30 days.
If you’re more than 90 days late and it is reported to the major credit bureaus (Equifax, Experian and TransUnion), it will remain on your credit file for seven years, experts say. Same thing if you default on the loan.
It’s important to highlight that each loan you took while in school may appear individually in your credit report, even if the loans are from the same lender and you make a single monthly payment on them. However, credit scoring models do recognize these debts as the same type of account, so if you’re behind on your monthly payment, this won’t weigh down your score multiple times.
In general, having negative marks on your report from missing payments can affect your ability to be approved for new credit and increase how much you’ll pay in interest if you are approved. Additionally, if you default on your loans, they could be sent out to collections. And this can be even more damaging to your score, as accounts under collections are considered as “seriously delinquent.”
Does student debt reduce my chances of getting approved for another loan?
Student loans can affect your ability to qualify for new loans beyond just the impacts to your credit score. If your monthly payments are on the high side, they could hurt 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.
If your monthly student loan payments are hurting your ratio, experts say you could consider applying for an income-driven repayment plan in the case of federal loans. Income-driven plans set your monthly payments based on your family size and income, so they may reduce how much you have to pay on your student loans each month, and some mortgage providers will consider this new, lower payment in your debt-to-income ratio. If you have private loans, you could look into whether you can get a lower interest rate and/or lower monthly payments via refinancing. For federal borrowers, refinancing is not advised because you lose eligibility for federal forbearance, income-based repayment and financial-hardship programs.
The bottom line
Student loans can be beneficial or damaging to your credit, depending on how you manage your finances. The key to using them to your advantage is staying on top of things.
If you’re currently facing difficulty making payments, one of the best things you can do is to contact your lender or loan servicer to see what options are available to you. You can also seek advice from a financial professional if you need help managing your student debt.
If you’ve exhausted other options, you can ask the lender if they’d be willing to put your loans temporarily in deferment or forbearance until you get back on your feet. You won’t make any progress toward paying off your debt, but it won’t impact your credit negatively, as a late or missed payment would.