Do Student Loans Affect Your Credit Score?

For many young people, student loan debt is the initial foray into the world of credit. Often, high school graduates take out student loans shortly after graduation, some before their first credit card.

However, student loans aren’t only for young people. Plenty of people take out student loans to further their education or complete the degree they didn't have time for in their younger years. 

Regardless of the timing, when you take out a student loan, it's common to wonder how it'll impact your credit score. You may be wondering, “Do student loans have a positive or negative impact on your credit score?” And, “Do student loans affect your credit score at all?”

In this article, we'll help clear up how student loans impact your credit score and more.

Do student loans affect your credit score?

Simply put, student loans can positively and negatively affect your credit score. This means a student loan can impact your ability to buy a home or new car, get a credit card, obtain a business loan and more.

Here are some of the credit scoring factors a student loan can impact.

Credit mix

Your student loans will show on your credit report as installment loans. This means they have fixed repayment terms, and once you pay them off, they're closed. These loan types can impact your credit mix, which is 10% of your FICO® Score. 

The credit mix shows the balance of the types of credit you have. The better balance you have between installment and revolving credit, which are open credit lines you can use repeatedly, the more positive impact it has on your credit score.  

However, if you have nothing but installment loans,  taking out a student loan can unbalance this mixture and lower your credit score. On the other hand, if you have nothing but revolving debts — credit cards and lines of credit — an installment loan can add balance to your credit mix and potentially improve your credit score. 

The impact on your credit mix will be nearly immediate in all cases, as the student loan servicers — the company that manages your student loan — can report the loan as soon as you take it out. So if you took out a student loan and wondered why your credit score suddenly dropped, the student loan’s impact on your credit mix could be the issue.

Length of credit history

Your length of credit history makes up 15% of your FICO credit score. This factor looks at the average age of your credit accounts. The older your average debt is, the more positive its impact on your credit score. 

Your student loans can often be a big factor in this scoring metric. Because many people take out their student loans as they enter college, those loans become their first debts, making them among the oldest. And because these are generally five- to 15-year debts, they remain your oldest account for many years.

When you first take out your student loan, it's a new loan and will have no positive impact on your length of credit history. In fact, a new student loan may even negatively impact it if you already have established credit. However, as your student loans age, they have a more positive influence on your credit score. 

On the downside, once you pay off your student loans and the lender closes the account, this is no longer a factor. So, if you haven’t taken out any other debt in the meantime, you could see your FICO Score drop.

Amounts owed

Your student loan also increases the amount of debt you owe, and the amounts owed variable accounts for 30% of your credit score. Generally, when looking at this variable, the biggest concern is your revolving credit utilization, but the total amount of debt — including student loans — can impact it too.

The more debt you owe relative to the original balance, the more negatively it impacts you. However, as you pay down this balance, you may see that negative turn into a positive.

Payment history

Every time you make an on-time payment, make a late payment or miss a payment on your student loan, the loan servicer reports it to the major credit bureaus — Equifax®, Experian® and TransUnion® — and it affects your payment history. 

Your payment history is the most important factor in your FICO credit score at 35%, so one late payment or missed payment can drag your score down. 

Student loans help you build a positive payment history as well as good credit. As long as you make on-time payments to your student loans, you may continue to build credit and a good credit score. This can also increase your ability to get credit in the future, such as when you want to finance a house or car and obtain some of the best credit cards.

To remain in good standing on your student loan payment history, you should try to make your monthly payment within 90 days of the due date. After 90 days pass without payment, the student loan servicer may report delinquency, which can lower your credit score. 

Debt-to-income ratio

While your debt-to-income (DTI) ratio isn't a factor in determining your FICO credit score, it plays a role in getting credit. When you apply for credit, whether it's an auto loan, mortgage, personal loan or credit card, the lender you applied to must verify you can afford the new debt. 

The creditor will look at your monthly debt payments relative to your monthly income to get a DTI ratio. For example, if you’re earning $5,000 per month and have $1,000 in debt payments each month, you'd have a 25% DTI. 

The lender then compares your DTI to its policies to determine if you qualify for the new credit. Even with a good credit score, you may not get approved if your DTI is too high, especially when financing a large purchase like a home or car.

Like credit card debt and any other loans you have, your student loan payments impact your DTI. This is true even if you are in deferment and your account shows a $0 monthly payment. The lender can use up to 0.5% of your student loan balance to calculate an estimated monthly payment to apply to your DTI. If you’re early in your college career and have only a small amount of loans, this could be a relatively small impact, but later-term students with higher student loan balances may see a greater impact.

Hard credit inquiry

On top of all these potential credit score impacts, some student loans also require a hard credit inquiry, which is when a lender reviews your credit file and score to determine creditworthiness. This can result in up to a five-point drop in your FICO Score.

However, the impact on your credit score from a hard inquiry is short-term. The FICO scoring model only accounts for hard credit inquiries made over the last 12 months.

Do federal student loans affect your credit score?

Yes, federal student loans can impact your credit score in various ways. There are four key types of federal student loans that cover various financial situations. Some may impact your credit score differently than others.

Direct Subsidized Loans

Direct Subsidized Loans are offered to undergraduate students who've demonstrated a clear financial need. The U.S. Department of Education defines a financial need as a difference between the cost of attending school and your expected family contribution, as determined in your Free Application for Federal Student Aid (FAFSA). 

The key benefit of a Direct Subsidized Loan is how the interest is charged. The Department of Education will pay the interest on a subsidized loan while you're in school at least part-time, for six months after leaving school and during any payment deferment period.

A Direct Subsidized Loan doesn’t require a credit check or cosigner to get approved. However, they can impact your credit score in the aforementioned ways.

Direct Unsubsidized Loans

Unsubsidized loans are for graduate and undergraduate students who can't show a clear financial need or a need to borrow money beyond their financial needs. The key distinction of an unsubsidized federal student loan is that the student pays interest on the loan during all periods, even if the student loan payments are in forbearance. 

Like its subsidized sibling, a Direct Unsubsidized Loan doesn’t require a credit check or cosigner to get approved. However, it can impact all the other credit scoring factors mentioned above.

Direct PLUS Loans

Direct PLUS Loans are available to qualified graduate and professional students as well as parents of dependent undergraduate students to pay for educational needs not covered by other financial aid. The student doesn't need to show a financial need to get approved, but this loan’s key distinction is that it requires a credit check. 

Unlike a credit check on a typical loan, where any negative marks or a low FICO Score might automatically disqualify you, the Department of Education is looking for specific negative information, including: 

• Accounts more than 90 days late with a balance exceeding $2,085.

• Accounts placed in collections or charged off in the last two years.

The Department of Education also looks to see if you have had any of these negative marks in the past five years, including:

• Default.

• Bankruptcy discharge.

• Repossession.

• Foreclosure.

• Charged-off or written-off debts.

• Wage garnishment.

• Tax liens.

Keep in mind, these negative marks aren't absolute disqualifications. The Department of Education may still approve you if you can meet certain requirements. 

Because a Direct PLUS Loan requires a credit check, you will receive a hard inquiry on your credit report, which can lower your FICOcredit score by up to five points. Also, since the payments are due while you're in school, they will also immediately impact your payment history and DTI ratio.

Direct Consolidation Loans

When you take out student loans, you take them on an as-needed basis, which means you may end up with multiple loans with several loan servicers. This can add to the complexity of repayment, but refinancing student loans into a consolidation loan can help.

The Direct Consolidation Loan allows borrowers to consolidate all their eligible federal student loans into one loan with a single servicer and monthly payment.

There is no credit check to refinance your student loans into a consolidation loan, since you‘re simply rolling multiple loan balances into one. There is no immediate credit score impact; however, there will be a longer-term impact on your payment history and the other credit factors mentioned above.

Do private student loans affect your credit score?

Another type of loan for education are private student loans. These generally have the biggest hit on your credit score for several reasons.

First, they are through a private lender. Therefore, private loans almost always require a credit check, which can immediately cause up to a five-point credit score decrease.

Second, they will immediately show on your credit report, impacting your amounts owed variable. However, they will also impact your credit mix, which could result in a small positive impact if you have mostly revolving debts.

Third, many private student loan lenders don’t offer in-school deferments, so your payments will be due while in school. This can have a near-immediate impact on your DTI because the full payment amount will show on your credit report right away.

Also, since federal student loans can have a lower interest rate than private loans, the payments on private student loans could be higher, depending on your loan terms and amount.

Yes, student loans affect your credit score like other debts

Student loans play by different rules than many other loans. This leaves some college students wondering, “Do student loans affect your credit score?“

The short answer is yes. They can still have the same positive or negative impact on your credit score, just like any other loan. 

Because they have the same credit score impact as a car loan or credit card payment, you should give your student loans the same priority when making your monthly payments. Doing so can help you build strong personal finances and a good credit score that will follow you long after graduation.  

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