Student loans 10 January 2023

How Do Student Loans Affect Your Credit Score Positively And Negatively

Student loans affect credit scores and most borrowers don't know which factors impact the most. Read through to find out more.

Do Student Loans Affect Your Credit Score?

Student loans are a great way to finance education and they do affect credit scores. Whether they are federal or private student loans, they can impact your credit score. Both federal and private loans have different terms along with payment policies and you have to pay back what you owe. There are different factors when taking out a student loan that can affect credit scores. We have detailed on all the ways that can have a positive and negative impact so that you can be mindful before taking out a loan. 

How Do Student Loans Affect Your Credit Score

Whether positively or negatively, student loans affect your credit score. A credit score is a forecast of your credit behavior. It depicts how likely a borrower is to pay a loan back and when (preferably on time!). It’s a figure that represents your creditworthiness and plays a significant role in analyzing a person’s credit files.

Student loans have a positive effect on your credit score when payments are done regularly and on time. On the other hand, late or skipped payments, and/or failure to pay back your loans are some of the things that impact your credit in a negative manner.

We have detailed below all the positive and negative ways that credit score is affected.

Positive Impact on Credit Score

Student loans can have a positive effect on your credit score in the following ways:

Timely Payments

Timely payments are the most important aspect that influences and affects your credit score. Making regular and on-time payments helps to build credit immensely in a good way and it has 35% impact on the score. For students, who take a loan with a cosigner, timely payments positively affect both the student’s and the cosigner’s scores.

Good Credit Mix

A student loan can help you mix credit for an impact on your score. For example, having a student loan and a credit card gives you a good credit mix. A good credit mix is helpful to students because it contributes 10% to their FICO score. Having a diverse combination of credit accounts such as student loans, car loans, and credit cards helps to improve your score, provided that they are paid for in a timely manner.

Length of Credit History

For most students, student loans help to establish a credit history earlier on in their financial life journey. Student loans help to establish a credit history that contributes at least 15% to your credit score. Lenders are then able to view how long your account has been active, and this helps to boost your overall score.

Accounts Owed

Having multiple credit lines can help if managed properly. If you have different debts that are paid timely and have not crossed over the limit, they can create a 30% positive impact on your credit score. However, if you have a lot of debt that is overdue and have many late payments this will be very negative.

Negative Impact on Credit Score

The following scenarios can result in student loans having a negative effect on your credit score.

Late or Skipped Payments

Some lenders charge a late fee as you miss out on your payment, which in turn can make it even harder for you to pay up your monthly installment. The more you delay your payment, the more damage it can have on your credit score. When a lender reports your late or skipped payment to the credit bureaus, the information stays on your credit report for up to seven years.

Failure to Repay

Failure to repay your student loan automatically damages your credit score significantly. When you feel that you are unable to repay the student loan, talk to your lender about lowering or pausing your monthly loan payment for a few months. Changing loan terms does not damage your credit as long as you stick to the new and agreed-upon terms.

New Credit

Applying for student loans is a beneficial way to get money to finance your education. However, applying for many different student loans in close proximity to each other can affect your credit score. Lenders will view you as high risk and this will negatively affect your credit score.

How to Manage Student Loans for a Good Credit Score

Student loans can be overwhelming, but this does not always have to be the case. Knowing how to manage student loans is not only good for your financial well-being, but it also helps you to maintain a good credit score.

#1 Know the Terms

A student should know the terms of every loan they take. Different student loans mean different interest rates and repayment terms. Knowing the terms helps you plan how you will pay back the loan and the extra charges involved such as penalties and additional interest charges.

Pros: Helps to avoid extra fees and penalties

Cons: Must oblige to deadlines after signing for the student loan

#2 Assess Your Grace Period

Each student loan has a grace period. A grace period is the amount of time a borrower has after graduation before they start to pay back their student loan. Most lenders give an average of six to nine months.

Pros: Gives ample time for students to secure a job after graduation

Cons: Must be paid immediately after the grace period whether you have an income or not.

#3 Pay off Higher Loans

As a way of managing student loans, a good strategy is to pay off the higher loans first. Higher loans attract high-interest rates and the quicker you pay them back, the better. If possible, plan a budget that helps you pay an amount higher than the required monthly installment.

Pros: Paying off loans within a short time reduces the interest

Cons: Consumes a big part of your income

#4 Be on the Lookout for Special Programs

Loan forgiveness is one of the special programs offered by non-profit organizations such as hospitals and government entities, including educational institutions. Keep an eye open for such programs and ensure that you are eligible to participate. Additionally, some employers offer benefits that align with student loan forgiveness.

Pros: Loans can be forgiven, canceled, or discharged without any repayments

Cons: May not help improve the credit score

#5 Consider Deferment

If worse comes to worst, and your current financial situation is dire, consider student loan deferment. People may go through economic hardships (lack of a stable job or losing a job/source of income). If this is your situation, talk to your lender and discontinue making payments for a while until your source of income stabilizes.

Pros: Allows time to plan how to repay student loans

Cons: Interest charges continue to be added to student loans

How is a Credit Score Calculated?

There are various types of credit scoring models but the most commonly used method is the Fair and Issac Corporation (FICO) score. The credit score ranges from 300–850, 300 is a poor score and 850 is considered an excellent score. Different aspects such as payment history, new credit, the amount owed, length of credit history, and the credit mix are factored in when calculating the credit score.

Do's & Don'ts for a Good Credit Score

Here are some basic dos and don’ts to help you manage and maintain a good credit score:

Make timely paymentsDon’t max out your credit cards
Make a good credit mixApplying for all loans will hurt your score
Use your credit cards wiselyDon’t be late in payments
Create a good debt portfolioDon’t be unresponsive to your lender
Sign up for automatic paymentsNever give out your personal information
Check statements regularlyDon’t be ignorant of credit reports


Do Student Loans Build Credit?

Yes, student loans can help you build credit, however, you have to be mindful of the debt burden and your ability to make payments. If your payments are delayed it can have a negative impact on your credit score.

Will my student loans go away after seven years?

Only the negative information about your loan goes away after seven years. However, student loans themselves remain up until the point you complete paying them off.

Does paying off student loan help credit score?

Timely and regular payments to pay off both federal and private student loans will positively impact your credit score. The history of payments is one of the largest factors in determining a good credit score.

Do student loans go on your credit report?

Yes, student loans can appear on your credit report. Making on-time payments will have a positive impact while missing payments or late payments can negatively impact your credit report.

Does refinancing a student loan affect credit score?

Refinancing can be a good option to help maintain your credit score. To qualify for refinancing, you must have solid credit. Consider refining options before damaging your current credit score.

Do federal student loans affect credit scores?

Yes, both private and federal student loans can impact your credit score. However, when deciding to take a loan, it is best to go for federal loan options first. This is because you can gain a few extra benefits with how federal student loans work.

How do getting private and federal loans affect credit score?

Private lenders carry out a credit check before approving a loan. A hard credit check sheds a few points off your credit score. However, this effect is only temporary as it impacts the FICO credit score for 12 months. Most federal student loans usually don’t require hard checks, except for Federal direct PLUS loans.

Some private lenders now allow students to get prequalified for loans with soft credit checks that do not impact the credit score. However, for the rate quote, they do require a hard check.

How does student loan forgiveness affect your credit score?

If you receive partial forgiveness, then it won’t impact your credit score directly. However, if your loan is fully forgiven, it will close your loan accounts which can have a small and temporary decreasing effect on your credit score, generally. In the long term, however, it can help with your credit as your overall debt will be reduced.

What is a good credit score for a student?

Credit scores range from 300 to 850. Anything above 670 is considered good credit. Credit scores above 740 are considered very good and 800 and above are considered excellent scores. The higher your credit score is, the lower the student loan rates you can get.

Final Thoughts

Student loans affect your credit score in numerous ways. They can have a positive or negative impact on your credit score and most lenders rely on this information when issuing loans. Understanding how student loans affect credit scores will help you take the necessary steps or precautions to avoid possible negative consequences.

Whatever your financial situation or personal circumstances is, you should be aware of the impact a timely and regular repayment has on your credit score. Non-compliance with the loan terms will most likely put a dent in your credit score and this may bring future repercussions.