Do Student Loans Affect Your Credit Score?

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Student loans can hurt or help your credit. If you make on-time payments, it can help boost your credit score over time. But missing a payment can cause a significant drop in your score. Depending on the type of student loan you have, you may get additional time to make your late payment before it is reported to credit bureaus.

Understanding what steps you can take if you can’t afford to make a payment can help you avoid a major blow to your credit.

How do student loans affect your credit score?

Like any other form of debt, a student loan can impact your credit in both positive and negative ways. If you manage your student loan responsibly, your credit score will likely benefit, but a mishandled student loan can have a variety of ramifications for your credit profile.

Positive impacts

While many students take on student loans before they have an established credit history, student loans can help boost a credit score, such as a FICO Score, over time. Several elements make up a percentage of the overall FICO Score. Some of the benefits you may see include:

• Payment history (35%): If your full monthly payments are made on time, it will help you build and maintain good credit. Since your payment history makes up over a third of your FICO Score, it’s crucial to stay on track.
• Credit mix (10%): Lenders like to see that you can manage different types of credit. For instance, having a student loan and a credit card may be better than having two credit cards.
• Credit history (15%): Many recent graduates may not have had the chance to establish their credit history. Having student loans can help with that. Student loans typically have repayment plans that can last from 10 to 30 years. This can help lengthen your credit history.

Negative impacts

Like other types of debt, student loans do have the potential to lower your credit score both temporarily and over the long term. Some of the downsides to consider are:

• Credit inquiry: If you apply for private student loans or student loan refinancing, the lender will typically run a hard inquiry on one or more of your credit reports, temporarily impacting your credit score. According to FICO, each additional hard inquiry lowers your credit score by less than five points.
• Negative payment history: Because your payment history is the most influential factor in your FICO Score, missing even one payment can be devastating for your credit score; it’ll remain on your credit reports for seven years. Lenders generally report missing payments to national credit bureaus if a payment is late by 30 days or more for private student loans, and by 90 days or more for federal student loans.
• Delayed benefits: Student loans won’t make a huge impact on your credit history until you start making payments after graduation. The biggest benefits come from timely payments, which many students don’t start making until six months after graduation.

How do student loans affect a cosigner’s credit score?

In general, student loans affect credit scores the same way for cosigners and primary borrowers. When you submit the application, the lender will run a hard inquiry on both applicants’ credit reports. On-time payments help boost the cosigners’ credit score, but a missed payment can damage their score significantly. This is because cosigners are guaranteeing they will make payments on the debt if the primary borrower doesn’t.

Beyond credit score, it’s also important to note that the student loan debt shows up on cosigners’ credit reports as if it’s their own. If they apply for credit — especially a mortgage — their debt-to-income ratio will include the student loan payment, even if they’re not making it.

If you are considering this option, make sure your cosigner is fully aware of the benefits and drawbacks.

How does student loan forbearance affect your credit score?

Because you and your loan servicer or lender have agreed to skip payments during this period, the forbearance won’t impact your credit score negatively. However, if you miss any payments after the forbearance period ends, it could damage your credit score.

It’s important to note that while forbearance can put your payments on hold, interest will continue to accrue and can increase your loan balance and monthly payment going forward.

How does student loan forgiveness affect your credit score?

Credit score impact on student loan forgiveness can depend on the type of forgiveness you receive. If you achieve only partial forgiveness, your loan will still be open, so there won’t be any direct impact on your credit score.

If you receive full forgiveness, it’ll close your loan accounts, which can affect your credit score slightly. You’ll have one fewer account on your record and the average age of your accounts could decrease. On the other hand, your debt-to-income ratio will be lower, which will make it easier to get approved for other loans.

That said, the benefits of forgiveness far outweigh the potential drawbacks to your credit, and the negative impact of closing a credit account is generally temporary and small.

Bottom line

As long as you repay your student loan as promised, it’ll have a positive impact on your credit score over time. Failing to do so can cause significant harm to your credit.

If you’re having trouble making payments, contact your loan servicer as soon as possible to inquire about forbearance or deferment. These two options allow you to temporarily pause your payments to avoid a negative impact on your credit. As an alternative, you could ask your student loan servicer to temporarily lower your payments.