Your credit score is based on information reported in your credit history. And, as a type of debt, student loans are included in your credit report. Your student loans can influence your credit score, so it's important to manage your student loans as you manage your overall credit. Fortunately, many of the same ways you would improve your credit score with non-student loans, such as making on-time payments and diversifying your credit mix, still apply.
Key Takeaways
- Making all of your student loan payments on time can help raise your credit score. As you pay off your loan, you lower your total debt, which can also improve your credit.
- Conversely, making late payments on your student loans will likely damage your credit score.
- If you're struggling to afford your student loan payments, debt consolidation or refinancing are possible solutions. However, refinancing federal loans means forfeiting their protections, such as income-driven repayment (IDR) options.
The Biggest Factors That Affect Credit Score
Information in your credit report—including student loans—is used to create a credit score. FICO scores are the most commonly used type of credit score, so understanding how your credit report translates into scoring can help you make better decisions.
Five main factors are considered when calculating your FICO score:
- Payment history: Representing about 35% of your score, payment history is the most important factor when constructing a credit score. On-time payments help your score. Late, partial, and missed payments can have a negative impact.
- Credit utilization: Another 30% of your score is based on how much money you owe relative to your available credit. If you use a large portion of your balances, your credit score could suffer.
- Length of credit history: How long you've been using credit also matters to your FICO score. About 15% of your credit score is dependent on how long you've had credit accounts open.
- Credit mix: About 10% of your credit score is based on the types of credit you have. For example, a credit card is a revolving line of credit, which is different from a student loan, which is installment debt. When you show you can handle different types of debt, you may see an improvement in your credit score.
- New credit: Finally, the last 10% of your score is related to how much new credit you've opened in a short amount of time. A lot of new credit can be a red flag to creditors.
Impact of Student Loan Debt on Credit Score
The most significant way that student loan debt can impact your credit score is through your payment history. If you make your payments on time, that reliability will show on your credit report and can be a boon for your credit score. However, payment history is a major part of your credit score, so defaulting on your student loans can have a major negative impact.
Your student loans can also help positively impact the portion of your score that deals with your credit mix. Your student loans are installment loans, so they are considered a different type of debt than credit cards, for example. If you keep up with your both credit card and student loan payments, lenders see that you can responsibly handle different types of credit.
Finally, because student loans often have longer terms, they can also influence the portion of your score that reflects your credit history.
Strategies to Improve Credit Score With Student Loan Debt
If you have student loan debt, there are some steps you can take to improve your credit score.
Make On-Time Payments
Making on-time payments is one of the most important things you can do for your credit score. When you pay on time and the full amount required each month, you build a positive credit history and avoid the negative hit to your score from missing payments.
Consolidate or Refinance Your Student Loans
You can make your student loans more manageable and potentially lower your monthly payments by consolidating or refinancing them. It's important to understand the differences between consolidation and refinancing so you can choose the best strategy for your needs:
- Consolidation: This entails combining your federal student loans into one loan. With consolidation, you may have a longer repayment term and/or a new interest rate, such as going from variable to fixed.
- Refinancing: By refinancing, you're replacing a federal student loan (or several student loans) with a new loan. The new loan typically has a different interest rate and repayment period. If you refinance federal loans, they become private, and you lose access to benefits like federal loan forgiveness and income-driven repayment (IDR) plans.
In both cases, the longer repayment term leads to a lower monthly payment that you're more likely to be able to afford, reducing the risk of missing a payment and hurting your credit score. A lower interest rate can also lower your total interest costs.
Consider Income-Driven Repayment
If you're not sure you can consistently make student loan payments, even after you've consolidated your loans, you may want to consider an IDR plan. These repayment plans apply only to federal loans and are based on your discretionary income. With some IDR plans, it's possible to have a $0 monthly payment—and your credit history will show you as having made that payment on time and in full.
Building a Positive Credit History With Student Loans
You can build a positive credit history while you have student loan debt. Start by:
- Making on-time payments
- Reviewing your budget to make sure you're paying your other bills on time and in full
- Considering your student loans as part of your overall credit mix
If you're eligible for a forgiveness plan like Public Service Loan Forgiveness, consolidating your federal loans and getting on an IDR plan can help you maintain your credit score until your balance is forgiven. Once forgiven, your original loans will remain on your credit history, but they will be reported as paid in full.
Private student loans might be a little trickier, as there's no forgiveness program. If you're concerned about making payments, consider contacting your lender about hardship programs, such as deferral and forbearance.
Getting into a hardship program can help you avoid the credit score consequences that come with missing payments.
Addressing Credit Challenges and Student Loan Default
Federal student loan servicers won't report delinquency to the major credit bureaus until you're at least 90 days behind on your payments. After 270 days, your loans go into default. This can have a greater negative impact on your credit score.
Additionally, if you're in default on your federal student loans, you're not eligible for further student aid. You also can't get onto an IDR plan or take advantage of forgiveness, deferral, or forbearance.
If you're in default, contact your student loan servicer about bringing your account back into good standing. There are different payment plans available that are designed to help you rehabilitate your defaulted student debt. Once you're no longer in default, you can use other strategies to make sure you can afford your payments and begin rebuilding your credit score.
You can also use the federal Fresh Start program. If you enroll in this program, the default can be removed from your credit report immediately, resulting in a potential credit score improvement.
How Does Student Loan Debt Affect Credit Score?
Your payment history is part of your credit report and is included in credit score calculations. If you miss payments, that information is reported to the credit bureaus and can lower your credit score.
Can Consolidating or Refinancing Student Loans Help Improve Credit Score?
If you're struggling to make your payments in full, consolidation or refinancing might help you secure a longer repayment term. With a longer repayment term, your monthly payment will decrease, making it easier to meet your obligation and miss fewer payments. Getting a lower interest rate can save you money in interest over the long term.
What Are the Consequences of Defaulting on Student Loans?
If you default on a loan, you'll likely see a big decline in your credit score due to a poor payment history. Additionally, if you default on federal student loans, you'll be ineligible for certain federal benefits, repayment plans, and future student aid until you rehabilitate your loans.
The Bottom Line
As a type of debt, student loans are included in your credit report and can impact your credit score. Because missed payments are likely to be especially detrimental to your credit score, consider using strategies like IDR and consolidation to reduce your monthly payment, making it more manageable so you can remain in good standing. If you've already fallen into default, consider using a program like Fresh Start to rehabilitate your loans and get back on track.
