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Do Student Loans Affect Your Credit Score?

Some student loans require no credit check, but they still affect your credit score.

Justin Cupler

Contributing Writer at Tally

May 21, 2021

For many Americans, student loan debt is their initial foray into the world of credit, as many high school graduates take out student loans shortly after graduation. That said, there are plenty of older learners who also take out student loans to further their education or to 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. Do student loans have a positive or negative impact on your credit score, or do student loans affect your credit score at all? 

We'll help clear up how student loans impact your credit score and more.

What are the types of federal student loans?

The term "federal student loans" is a catchall for a range of federally backed education loans. There are four key types of federal student loans to cover various financial situations. 

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)

A Direct Subsidized Loan's key benefit is how it handles interest charges. The Department of Education will pay the interest on a subsidized loan while you're in school at least half-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. 

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. A subsidized federal student loan's key distinction 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. Because there's no credit check, a Direct Unsubsidized Student Loan has no immediate impact on your credit score. It will, however, affect it after graduation, which we'll get to soon.

Direct PLUS Loans

Direct PLUS loans are available for graduate and professional students and 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 requirement of a credit check. 

The credit check isn't like a typical loan, where any negative marks or low FICO® score will automatically disqualify you. Instead, 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.

There are also specific negative marks the Department of Education is looking for in the past five years, including:

  • Default.

  • Bankruptcy discharge.

  • Repossession.

  • Foreclosure.

  • Charged-off or written-off debts.

  • Wage garnishment.

  • Tax liens.

These negative marks aren't sure-fire disqualifications, though. 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 FICO credit score by a few points. Also, since the payments are due while you're in school, there are additional credit impacts that we'll touch on later.

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 services. This can add to your repayment confusion.

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 for a consolidation loan, so there is no immediate credit score impact. There will, however, be a longer-term impact that we'll touch on later. 

Do Student Loans Affect Credit Score?

Yes, student loans impact your credit score — potentially both positively and negatively. We've already covered the initial impact caused by taking out a student loan, as unsubsidized and consolidation loans require credit checks, resulting in a hard credit inquiry, which can have a slight negative impact on your FICO score.

While the inquiry is a short-term credit score impact, there are several long-term effects student loans can have on your credit score. 

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 will help count toward 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 again and again, the more positive impact it has on your credit score.  

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 to help determine your credit score. The older your average debt is, the more positive impact it has 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. 

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 no longer becomes a factor. 

Payment history

Every time you make an on-time 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 goes toward 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 way down. 

Student loans help you start building a positive payment history and good credit right after leaving college without resorting to high-interest credit cards. As long as you continue making on-time payments to your student loans, you may continue to build credit and a good credit score.

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 huge role in getting credit. When you apply for credit, whether it's an auto loan, home loan, personal loan or credit card, the lender you applied to must verify you can afford the new debt. 

They will look at your monthly debt payments relative to your monthly income to get a DTI ratio. For example, if you earn $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 their 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. 

Student Loans and Their Credit Score Impact

Student loans often play by different rules than many other loans due to their lack of credit checks and other special rules. However, they can still have the same impact on your credit score as any other loan, positively and negatively. 

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 it comes to making your monthly payments. Doing so can help you build strong personal finances and a good credit score that'll follow you long after graduation.  

If you’re looking to better manage your credit cards, the Tally line of credit1 can help. This credit line offers an interest rate that’s often lower than most credit cards. Plus, Tally will manage all your monthly credit card payments, so you never miss one, and may help improve your credit score factors. 

Learn how Tally can help you improve your credit score factors.

1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) Will be between 7.9% - 25.9% per year, and will be based on your credit history. The APR will vary with the market based on the Prime Rate.