How Do Student Loans Affect Your Credit Scores?

Federal and private student loans are reported to the three major U.S. credit bureaus. Like any other debt, delinquencies and defaults will affect the credit history and credit scores of the borrower and the borrower’s cosigner, if any. But, there are also several ways in which student loans affect credit scores differently than other types of debt.

Requirements to Report Student Loans to Credit Bureaus

The Fair Credit Reporting Act (FCRA) requires all debts, including private student loans, to be reported on the borrower’s credit history. The FCRA does not address federal student loans, which are controlled by the Higher Education Act of 1965. According to the FCRA, defaults may be reported to the credit bureaus 180 days after the date of the default.

The Higher Education Act of 1965 [20 USC 1080a] requires federal education loans to be reported to each national consumer reporting agency. Consumer reporting agencies include all three major credit bureaus, namely Equifax, Experian and TransUnion.

The reports cover all federal education loans, including those in good standing and those in default. The reports are required to include the total amount borrowed, the remaining balance owed, the repayment status of the loans, the date the loan entered into default (if applicable) and the date the loan was paid in full.

Note that credit performance is reported on the credit history of only the borrower and cosigner. For example, Federal Parent PLUS loans affect the parent’s credit score, not the student’s credit score.

Negative information about federal and private student loans remains on the borrower’s credit history for 7 years.

Impact of Student Loans on Credit Reports

As with any debt, student loans can affect your credit score negatively and positively. Skipping a payment and paying late will hurt your credit score. Paying your student loans on time will help your credit score.

Most students start with a thin or non-existent credit history. To have a credit score, you must have at least one account that has been open for six months or more and at least one account reported on the credit history within the last six months. Accordingly, the student loan repayment behavior will have a disproportionate impact on a student’s credit scores for several years after graduation.

When shopping around for a private student loan or refinance, hard inquiries within a short period of time (typically 30 days) will count as a single inquiry. This limits the impact on the your credit score. The credit bureaus can recognize that you are seeking just one student loan, not multiple student loans, when you are shopping around. So, try to limit shopping around to just a week or two, to minimize the impact on the credit score.

Some lenders offer prequalification, which does not involve a hard inquiry on your credit history.

How Student Loans Differ from Other Debts

There are two main ways in which federal student loans are different from typical debts in ways that affect the credit score. 

• If a borrower defaults on a federal student loan, they have a one-time opportunity to rehabilitate the defaulted student loan. Rehabilitation removes the default from the borrower’s credit history, yielding an improvement in the borrower’s credit scores. However, the delinquencies will remain on the borrower’s credit history.
• Borrowers can repay their federal student loans using an income-driven repayment plan. This bases the monthly loan payment on the borrower’s income, as opposed to the amount they owe. This can significantly reduce the debt-to-income ratio, increasing borrower’s eligibility for mortgages and other types of consumer credit.

Both federal and private student loans allow borrowers to defer repayment during the in-school and grace periods. These periods of non-payment do not affect the credit history. Deferments and forbearances show up on the credit history, but indicate a monthly payment obligation of zero.

However, some private student loan lenders will allow borrowers to make small “touch” payments during the in-school and grace period, such as $25 per loan per month or interest-only payments. These payments get reported as real payments on the borrower’s credit history, having a positive impact on the credit score if the borrower makes them on-time. 

Private student loans provide borrowers with the option of a partial forbearance as an alternative to a full forbearance. During a partial forbearance, the borrower makes interest-only payments for a period of time. This can contribute positively to the borrower’s credit score, while a full forbearance has no impact.

There are no prepayment penalties on federal and private student loans, so borrowers can make partial payments, such as interest-only payments, during an in-school deferment or forbearance, with a positive impact on the borrower’s credit score.

Sign Up for Auto-Debit to Improve Your Credit Scores

According to Fair Isaac Corporation, the company behind the FICO credit score, about 35% of the credit score is based on your on-time payment history. Other factors, such as credit utilization (30%), length of credit history (15%), credit mix between revolving credit and installment loans (10%) and new credit activity (10%), have less of an impact on the credit score.

Thus, the single most important thing a student loan borrower can do is to pay every bill on time. Take every debt obligation seriously, making sure to send the monthly payment several days before the due date. Even if the payment is just a few days late, it will be recorded as delinquent. That’s all it takes to ruin an otherwise good credit history.

Keep track of your loans. Put a note in your calendar two weeks before the due date for your first payment. The first payment is the payment that is most likely to be missed. Check Studentaid.gov and AnnualCreditReport.com to identify any loans you may have overlooked.

Both federal and private student loans offer auto-debit, where the monthly student loan payment is automatically transferred from the borrower’s bank account to the lender. Signing up for auto-debit has a positive impact on the borrower’s credit score, because borrowers automate their loan payments are less likely to miss a payment.

Signing up for auto-debit can also save money, since many student loan lenders will reduce the interest rate by a quarter of a percentage point as an incentive.