Tower Loan Blog

Do student loans affect credit score?

Student loans are ubiquitous when it comes to finding ways to finance higher education. There are usually many sources of helpful information for navigating the process of obtaining student loans, but that’s where the help usually ends.

Taking out a loan of any kind can impact your finances in ways that may not be obvious at first. One of the most common — but least talked about — ways a student loan impacts finances is how it can affect your credit score.

It’s well known that not paying off a car loan or being late on payments can affect your score, but do student loans affect credit score?

Below, we’ll explain how credit scores work, how student loans can affect your credit score, and then answer some of the most common questions regarding student loans.

How Are Credit Scores Calculated?

It wasn’t long ago that credit scores were mostly shrouded in mystery. So much so that even obtaining your own credit score was an expensive and time-consuming process. Thankfully, much of that has changed, but many people still don’t understand how credit scores are calculated.

A credit score is usually referring to what is really a FICO score. The FICO score calculation was created by a data analytics firm known as Friendly Isaac Corporation. The exact FICO methodology is not public, but most credit experts agree the system looks at five major areas of individual borrowing to determine a score. The actual calculations can be quite complicated and have different weightings within each category.

The breakdown below is a good overview of just how the system works.

Payment History

This accounts for roughly 35% of a FICO score and is based on your past history of making payments on time. Late payments or delinquencies are counted in this as well. The length of time plays a factor here in how much each infraction is weighted in the overall score. Also, there are differences in how federal loans are generally reported when it comes to late payments, which we’ll touch on later.

Any defaults or bankruptcies can also be included in the payment history portion of the FICO calculation. There is some weighting that takes into consideration how serious the issues were. So a 1-day late payment of $20 will not be scored the same as being 6 months behind on a car loan.

The score also looks at how often these payment issues arise.

Current Debt

This accounts for 30% of the FICO score and looks at how much actual debt you have compared to your borrowing limit. This ratio is known as credit utilization and lenders as well as the three major credit reporting agencies prefer this number to be 30% or less.

So if your credit limit is $10,000, it’s best to keep the amount borrowed below $3,000 to optimize your credit score. All of your debt is added to this calculation and viewed as a whole. Also, different types of debt are sometimes weighted differently.

Credit History Time

This accounts for roughly 15% of your FICO score and looks at how long your overall credit history is. Longer credit histories with good metrics will score higher than credit histories of only a year, even if everything was paid on time.

New Credit Applications

This accounts for 10% of the FICO score and looks at how often a borrower acquires or applies for new loans or credit lines. More frequent applications or borrowing can negatively impact a FICO score.

Credit Types

This also accounts for 10% of your FICO score and measures the mix of your different loan types. Generally, a mix of several types of loans that have been successfully paid off will positively impact your FICO score. Only having one type of credit can hurt this score.

So, now that you see what goes into a credit score, we can start to answer the big question — how do student loans affect credit scores?

How Student Loans Work

Student loans are broken into two main categories, these are federal student loans and private student loans.

Federal Student Loans

Federal student loans are offered by the federal government through the U.S. Department of Education. Within the federal student loan program, there are two main types of loans as well.

Direct Subsidized Loans

The first is direct subsidized loans. These loans are partially subsidized by the federal government, meaning that the federal government covers the interest while the student is in school and meets certain criteria. Once the student graduates, the interest on the loan is then the student’s responsibility.

To obtain a direct subsidized loan, certain criteria must be met by the borrower regarding their income and financial status. Not everyone will qualify for a direct subsidized federal student loan.

Direct Unsubsidized Loans

Direct unsubsidized loans are federal loans where interest accrues as soon as the loan is taken out. So in this case, the loan is accruing interest while the student is still in school.

But do federal student loans affect credit score? Yes, because they are still installment loans that must be paid back, even if they are from the government.

Private Student Loans

Private student loans are loans given out by private lenders such as banks, credit unions, or recently, online lenders. These loans can have terms that vary quite a bit between lenders.

Private loans also require a credit check, unlike federal loans which do not require a credit check. However, since loans for education would normally require a credit score higher than what the average student may have, these often require a co-signer. In most cases, this is generally the parent or guardian of the student borrowing the money.

So, does a student loan affect credit score? We’ll answer that question below.

Do Student Loans Affect Credit Scores?

Although student loans, especially federal student loans, have slight differences from standard installment loans, they are mostly treated the same when it comes to how they affect a credit score. This means that late payments or delinquencies will have a lasting impact on your overall credit score, sometimes up to seven years.

There is a difference between federal and private loans though when it comes to reporting delinquencies. With federal loans, they will wait 90 days before reporting to the major credit agencies. However, with private loans, they can report in as little as 30 days.

So as with any installment loan, it’s important to make the payments in a timely fashion and avoid falling behind. A late payment here and there of a few days over the span of the loan will generally not harm your score too much, but extended delinquencies or frequent missed payments will be a problem.

On the other hand, if you make all your payments on time, your credit score is positively impacted. So student loans can help to build a credit score, especially since most people taking these loans out will be younger and therefore have less credit history.

This also applies if you had a parent or someone else cosign for a private loan. In this case, the loan impacts both the credit score of the original borrower and co-signer.

So, to summarize, do student loans affect credit? The answer is a resounding yes — and you can make it work in your favor.

Refinancing Student Loans

Once again, like most installment loans, student loans can be refinanced. This applies to both federal and private student loans and it doesn’t matter if they’ve already been previously refinanced.

Refinancing is similar to getting a new loan, so your credit score at that time will play a major role. You’ll also need to have already graduated as most lenders will not refinance while still in school.

You can refinance both private and federal student loans, but remember if you transfer your student loans to a private lender for refinancing, you lose any special protections that federal loans offer.

Finally, refinancing your student loans will not negatively harm your credit score. As long as you fulfill the obligations of the new arrangement after refinancing, you can continue to build credit by making payments.

Many lenders will only do a “soft” credit check to see if you qualify for student loan refinancing. This means that simply checking if you qualify from several lenders won’t harm your credit score.

When you finally do decide to refinance, the lender will do a more thorough credit check, but this harm to your credit score is negligible.

Student Loans and Credit Score FAQs

Does Deferring A Payment Hurt Credit?

No. If the deferment was an agreement made while payments were still being made and on time, then it will not harm your credit score. However, if you wait until you have missed payments or stopped paying altogether, then that will harm your credit score, even if you are able to get a deferment later.

One exception here is that your loan will grow larger during the deferment, which may increase your debt and that may negatively impact your credit score. But the actual act of deferment does not.

Does Paying Student Loans Increase Credit Score?

Yes. Paying your student loans on time is similar to any other type of installment loan. Making timely payments until it is fully paid off builds a positive credit history and score. The opposite can also be true though and missing payments or defaulting can harm your credit score.

Does Student Debt Affect Credit Scores?

Yes. A portion of your credit score is calculated by how much debt you are carrying. So having student loan debt may negatively affect your ability to borrow more money.

However, as the debt is paid down, the negative impact decreases and has no lasting effects like a default or delinquency would have. So, will paying off student loans help credit? Yes, because it helps reduce total debt and builds history.

What Happens if I Skip a Payment?

Depending on whether it is a federal or private student loan, this may be handled differently. Private loans generally report late payments in 30 days. Federal loans are all reported in 90 days.

If you miss a payment, try to make that payment as soon as possible so it causes the least amount of harm to your credit. Missing one payment and then paying it and catching up quickly will usually not harm your credit.

Can I Pause Student Loan Payments?

Yes. You can request deferment for both federal and private loans. In each case, you will need to meet certain criteria in order to be granted a deferral.

However, interest and other fees may still accrue during the deferral. But a deferral does not harm your credit score if you request one or are granted one before falling behind on payments.

If you need a deferral, make sure to request one before missing any payments.

How Much Do Student Loans Affect Credit Score?

Student loans are the same as any other installment loan, so they will have an impact on your credit score. Most borrowers are younger, so this means their credit history is sparse, so the student loan will make up a majority of their credit history.

Because of this, student loans may have a greater effect on your credit score due to their size and lack of other credit lines or loans. This means it’s important to take the responsibility of student loans seriously as they can play a substantial role in building credit in the future.