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Student Loans And Your Credit Score

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In a Nutshell

Like all loans, student loans impact a borrower’s credit history, either positively or negatively. A borrower’s credit history then impacts a borrower’s credit score, as assigned by any of the major credit reporting bureaus. Credit scores affect a borrower’s ability to receive future credit with good interest rates and favorable terms generally. It is very important to have a positive credit score, whenever possible. This article explains how student debt and credit scores affect each other and what related information borrowers should consider when taking out student loans.

Written by Attorney Thomas J. Pearson
Updated July 19, 2021

Like all loans, student loans impact a borrower’s credit history, either positively or negatively. A borrower’s credit history then impacts a borrower’s credit score, as assigned by any of the major credit reporting bureaus. Credit scores affect a borrower’s ability to receive future credit with good interest rates and favorable terms generally. It is very important to have a positive credit score, whenever possible. This article explains how student debt and credit scores affect each other and what related information borrowers should consider when taking out student loans.

Student Loans Will Affect Your Credit Score

How much your student loans will affect your credit score will depend on a few different factors. These factors include: Your total student loan balance, your payment history, what the scoring model the lender is using, etc. 

The loan balance is the total dollar amount that you owe. It’s important to have some loan balances to have a good credit score. This is because, to have good credit, you’ll need to prove that you can borrow money and repay it. Student loans are not the only way to build credit - you can build a good credit score by taking out other types of loans and paying them on time. Payment history is exactly what it sounds like: your record of paying off debt and whether you pay on time. 

You must have a good payment history to have a good credit score because that kind of positive trend shows lenders that when you borrow money, you are inclined to pay your loans back on time. On the other hand, it’s bad for your credit score to have too much student debt and to miss payments, because that kind of history makes it appear as if  you don’t repay money that you’ve borrowed in a timely manner.

When you apply for a loan, like a mortgage or car loan, lenders look at more than your credit score. They also look at your debt-to-income ratio. Debt-to-income ratio is a way of comparing your total debt to how much money you make. Lenders don’t like when your income is low compared to the amount of debt you have. If your income is low but you have a lot of student debt, lenders might be more hesitant to approve you for a loan in the future, such as an auto or home loan.

The big picture is that student loans will help your credit if you make timely payments and have a good debt-to-income ratio. But your credit will be negatively impacted if you miss student loan payments or if your student loan balances are too high when compared to your income.

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How Your Credit Score Affects Your Student Loans

Your credit score can affect your ability to receive private student loans, but not federal student loans. Federal student loans are loans issued by the United States Department of Education. Private student loans are issued by companies or banks, not the government.

Federal student loan eligibility and interest rates are not affected by credit history. Eligibility and interest rates are set by the federal government. So, a borrower’s credit score doesn’t impact their ability to receive a federal student loan. Also, borrowers’ credit scores don’t affect the interest rates on their federal student loans.

Private student loans are different. When borrowers apply for a private student loan, lenders look at a borrower’s credit score to decide whether to approve the loan and what terms to offer. Sometimes, private student loan companies will approve student loans for borrowers with low credit scores. Usually, lenders set higher interest rates for borrowers with lower credit scores. This means that private loans are more expensive for borrowers with worse credit histories than they are for those with good credit histories.

Making timely payments on all student loans is extremely important for your credit history. Missing payments or going into default can severely damage your credit score. Building your credit score back up after defaulting on student loans can be a complicated process and can take a long time.

How Is Your Credit Score Calculated?

Credit scores function as a short-hand summary of a borrower’s credit history. Credit history includes almost everything related to someone’s record of borrowing money and paying it back. Many factors go into calculating a credit score. A few important factors include: 

  • Payment history, 

  • Amount and type of debt, 

  • The age of credit history, 

  • The diversity of loan types, and 

  • Number of inquiries on a borrower’s credit history.

Different types of debt impact credit history differently. For example, a federal student loan affects credit history differently than credit card debt does. Loan diversity, or credit mix, simply means that a borrower has different types of debt. It’s good to have different types of debt because it shows lenders that you’re responsible when paying down different types of debt.

All borrowers have more than one credit score because there are three different credit bureaus that calculate credit scores differently. On top of those three credit scores, borrowers also have a FICO score. A FICO score uses data from all three credit bureaus for its score calculation. FICO is typically used by lenders for bigger loan applications like home mortgages.

There are also different types of FICO scores – different lenders choose which type of FICO score they use depending on their preferences and goals.

How To Check Your Credit History

You can get your credit report for free from all three major credit bureaus once a year. As a result of the Covid-19 pandemic, you can get your credit report even more frequently for free. Checking your credit history often is very important for several reasons. Knowing your credit score can help you determine which loans you’re eligible for and what loan terms (like interest rates) you should expect to see. 

If your credit score is too low, you might not receive good interest rates and favorable other terms on loans. Even worse, bad credit can prevent you from getting certain loans at all, depending on the lender and the type of loan. In short, knowing what your credit report says will help you make informed decisions about seeking future credit and how hard you’ll likely need to work to repair any damage that may have been done already so that you can secure favorable credit in the future. 

Second, you should make sure that your credit history is accurate by checking your credit report against information contained in past bank statements, etc. Sometimes, false or misleading information is reported to credit bureaus. Credit bureaus are required to correct false information for free, but you must notify the bureau of the error. All of the credit bureaus have a process for reporting false information. If you notice an error on your credit history, you should use the credit bureau’s process for disputing false reporting. You should also submit the dispute to all three bureaus, because only reporting an error with one won’t fix errors with the other bureaus. The United States Federal Trade Commission has a helpful webpage on how to navigate the three bureaus’ dispute processes. Removing false information from your credit reports will help to improve your score. How much it will help will depend upon how significant the error is.

Student Loans And Your Credit Score

The decision to take out specific kinds of student loans is an important one. Federal student loans come with many benefits like income-based repayment plans and student loan forgiveness. Private student loans sometimes offer lower interest rates but don’t have the strong repayment and forgiveness options as federal loans.

If you’re considering using private student loans, you should look at several lenders to compare interest rates, repayment plans, and other benefits. Be careful when applying for private loans, however, because applying for too many loans can negatively impact your credit score.

When loan repayment begins, you should educate yourself on all of the repayment options available to you. The repayment plans available for federal student loans can be extremely helpful in managing your debt. If you're having trouble keeping up with monthly payments, you can look into forbearance and deferment. The most important thing is to avoid delinquency (missing a payment) or default (not making payments for 9 months), which can have severe impacts on your credit history (and your credit score by association).

How A Co-Signer Can Help You Get Student Loans

When applying for private student loans, some borrowers may need to have a co-signer attached to their loan(s) to be approved. A co-signer is another person who promises to pay the loan if the borrower does not pay. 

Sometimes, having a co-signer will help borrowers with lower credit scores get approved for loans and possibly get better interest rates. The co-signer is responsible for the entire amount of loan if the borrower does not pay, so it’s important that both the borrower and co-signer understand this reality before signing onto a loan.

Refinancing Student Loans

Student loan borrowers can also refinance their loans with a private lender. When you refinance a loan, you’re essentially getting a new loan to pay off the old loan. Then, you make payments to the new private lender. Sometimes this is a good option if the private lender is offering a lower interest rate than the one you’re currently paying. 

However, refinancing is a serious decision, especially if you’re refinancing federal student loans. Federal student loans have many benefits that private student loans don’t. For many people, especially people who don’t have a high income, the income-based repayment and forgiveness options available for federal student loans are incredibly helpful. You won’t want to lose access to these repayment programs by refinancing your federal student loan with a private lender.

Generally, interest rates on loans are also determined by your credit score. You'll probably have to pay more in interest if you have a bad credit history. Some loans use compound interest, which means that unpaid interest is added to the principal of the loan and causes more interest to build up. This is one of the reasons why it’s extremely important to make timely payments on student loans and explore all payment plans available.

Let’s Summarize...

Although your credit score doesn’t matter when it comes to being approved for federal student loans, all student loan debt impacts your credit score like any other loan does. Your credit history plays a huge role in most aspects of your finances. Your ability to buy a house with a mortgage or buy a car with an auto-loan all depend on your credit score. So, treat your credit score (and the ways in which your student loans could impact your credit score) with care!

Written By:

Attorney Thomas J. Pearson


Thomas “TJ” Pearson is a Staff Attorney at the Metropolitan St. Louis Equal Housing and Opportunity Council (EHOC). He represents tenants in eviction cases and related landlord-tenant disputes. TJ is from Belleville, Illinois and currently lives in St. Louis, Missouri. He receive... read more about Attorney Thomas J. Pearson

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