How Do Student Loans Affect Credit? What You Need to Know

The information in this article is current as of February 15, 2022.

If the subject of student loans is on your mind, you’re not alone. Almost 45 million Americans currently have outstanding student loans.

So it’s natural to wonder, “How do student loans affect credit?” when you’re exploring ways to pay for your education.

While many people may be hesitant to approach the subject of loans, student loans don’t have to harm your credit score. You can maintain or improve your credit score by selecting doable monthly payments and paying them in full each month. If you consistently miss payments or fail to pay your loans, your credit score will decrease.

Below we provide even more details about how student loans affect your credit. Keep reading to learn more!

How a Credit Score Is Calculated

There are hundreds of credit scores, but the best-known one is the FICO score. The FICO score ranges from 300 to 850, with 850 the highest.

Five categories build your FICO score. Each category makes up a given percentage of the overall score.

Payment History: 35%

Payment history is 35% of your overall score. The payment history has the heaviest weight on your credit score and is determined your payments. On-time payments will keep your score high, while late or missed payments will lower your score.

Amount Owed: 30%

The amount owed is 30% of your overall score. Think of your amount owed as a balanced ratio to your credit. For instance, if you have $5,000 in credit available each month and use $3,000, your amount owed is 60% of your credit availability.

Lenders may assume that you have finical difficulties if you’re using a large amount of your credit. This may lead them to lower your score if they believe you to be a higher risk. Therefore, the general recommendation is to keep your amounts owed to 30% or less of your credit availability.

Length of Credit History: 15%

Length of credit history is 15% of your overall score. The longer you have a credit line, the stronger your score will be. Your oldest and newest credit line’s age (and the average age) determines history length.

New Credit: 10%

New credit is 10% of your credit score. Therefore, if you apply for new lines of credit in a short time frame, lenders will see you as a higher risk.

Credit Mix: 10%

Your credit mix is 10% of your credit score. Lenders want to see that you have a diverse mix of credit accounts – like student loans, credit cards, and car loans. A combination of credit can demonstrate that you know how to balance making multiple payments on time.

How Do Student Loans Affect Credit?

You may be wondering: “Do student loans lower your credit score?”

Your student loans actually can build your credit if you pay on time. Paying bills on time is the most critical factor in your credit score. So if you make regular, on-time payments, you can build your credit.

Boost Credit Mix

Student loans can help boost your credit score by raising your credit mix. In addition, if you have other credit types and make payments in full each month, student loans can be another way to show your credibility to lenders.

Even though your credit mix is only 10% of your total credit score, it can give you a boost with lenders. As long as you make all of your payments on time with each credit type, you can expect your score to remain high or even increase.

Lengthen Credit History

While paying off loans as quickly as possible should always be your goal, you don’t have to sweat long repayment periods – they can help you.

This is because you can build your credit score with student loans by adding to the length of your credit history.

Student loans usually involve long repayment periods. Your repayment period will usually be up to 10 years. In some cases, it can even be up to 30 years. This long time frame can help you build a healthy credit history.

Student Loans Taken Out by Parents

Remember that students loans can only build the credit of the person who took them out. Likewise, federal parent PLUS loans and private parents loans will only affect the parent’s credit.

But if a student cosigns a loan with their parent, the loan will affect both of their credit scores. So students who want to build their scores but may not take on the entire loan burden may wish to consider a cosigning option.

Pay Late or Skip a Payment

Making your payments on time is crucial to maintaining a high credit score. However, your score won’t immediately drop if you forget to make a payment for a brief period. Forgetfulness is normal, and you do have a bit of a grace period.

Your score will start to drop once your lender reports your late payment to credit bureaus. Typically, they’ll report to the three major credit bureaus: Equifax, Experian, and TransUnion.

Servicers wait at least 90 days to report late payments on federal loans. You have less time with private student loans: lenders can report them after 30 days. Keep in mind that even though lenders won’t report you in those first 30 days, they can charge late fees as soon as you miss a payment.

If a lender reports your late payment, it will stay on your credit report for seven years. And the more overdue your payment, the worse your credit will be damaged.

Your federal student loans will default if you don’t make a payment for 270 days. This will significantly hurt your credit score for more than 90-day delinquency.

If You Cannot Pay Loans

In some situations, you may not be able to pay your loans at all. When this happens, reach out to your lender to see if you can lower or pause your monthly payments.

You may be able to sign up for an income-driven repayment plan. This means that a percentage of your discretionary income will automatically repay your loan.

Your payment will usually be between 10% to 20% of your income but can be modified based on your employment.

If you’re earning a higher income, you can increase the amount of your income that goes toward repaying the loans. On a lower income, you can adjust payments accordingly.

If you have loans from a private lender, you may be able to apply for a modified payment plan. In addition, your lender may be willing to work with you to create new terms for your repayment.

In worst-case scenarios, you can enroll in deferment or forbearance to temporarily pause your monthly payments.

You won’t hurt your credit score if you change the terms of your loan. Your key responsibility is to handle your monthly payments – whether it’s $500 a month or $0 a month.

Refinancing Student Loans

Many people refinance their student loans during the repayment process to cater their education to their budget.

It’s a wise idea to research different rate options before refinancing your student loans, so you can find the lowest rate possible.

Refinancing your student loans will typically involve a hard inquiry on your credit report. Hard inquiries are a request to check your credit to take points off your score.

You can avoid hard inquiries by applying for all loans you’re comparing within a 14-day timeframe. The FICO credit score model counts multiple inquiries of the same type as just one hard inquiry if they happen simultaneously.

So, if you want to compare 10 different student loan options within the same 14 days, it will appear on your credit score that you’ve only made. However, federal direct PLUS loans, which are for parents and graduate students, require one. In addition, all PLUS loans granted within a given year will have the same rate, so your credit score won’t determine the terms or rate of your loan.

For private loans, at least one borrower will need good credit. The lender will conduct a credit check to see if you qualify. Higher credit scores will often result in lower interest rates. Undergraduate students will likely need a co-signer to receive private loans. Inquiry.

Another option is to get your rate estimates through lenders’ pre-qualification processes. Some lenders may be willing to give you a rate estimate that won’t lower your credit.

How Credit Scores Affect New Loans

All student loans can improve or lower your credit. But if you have no existing credit or a low credit score, you will still be eligible to take out a student loan.

Most types of federal student loans do not require a credit check. This includes all federal loans for undergraduates. If you have poor credit, look for federal student loan options.

However, federal direct PLUS loans, which are for parents and graduate students, require one. All PLUS loans granted within a given year will have the same rate, so your credit score won’t determine the terms or rate of your loan.

For private loans, at least one borrower must have good credit. The lender will conduct a credit check to see if you qualify, and higher credit scores will often result in lower interest rates. Undergraduate students will likely need a co-signer to receive private loans.

Understanding Your Student Loan Credit Score

Student loans may be an intimidating topic for many students and parents. Still, they can end up benefiting your credit score when appropriately approached.

The key to answering the question “How do student loans affect credit?” is to remember the importance of monthly payments. So long as monthly payments are agreed upon and handled consistently, your credit score will thank you.

Lifeline Free Monthly Wireless Service

If you qualify for government student loans, you may also qualify for Lifeline service. This federal benefits program gives low-income consumers free or massively discounted communication services.

Lifeline helps subsidize the cost of wireless cell phones and internet services. More than 35 million people qualify for free monthly wireless service. In addition, you may be eligible for Lifeline through income level or participation in other federal programs. It might be a good idea to look into this to help you save on your phone and internet service costs.

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