Student Loans & Credit Scores

Student Loans and Credit Score - Do Student Loans Affect Credit Score

To get a private student loan, credit is a critical factor.

If you’ve shopped around recently for private student loans, you’ve probably found out that you need a healthy credit score, or a cosigner with good credit, to qualify.

But what determines your credit rating? There are a variety of factors that are considered, including your payment history (ability to consistently pay your bills), amount owed, credit history (how long you have been using credit), the amount of new credit you possess and the types of credit (bank cards, gas cards, loans, etc) you carry. Your credit score will range between 300 and 900, with anything above 720 being considered a good score.

For most college students, this is not the case and they must use a cosigner to secure private student loans. Even if you only take out federal student loans while in college, you should be aware how your student loans will affect your credit rating.

Do student loans affect credit score? Will my student loans be reported as one debt or several?

Typically, each time you take out a student loan (semester, quarter, etc) it will be reported as a separate debt. For example, if you are disbursed a loan payment each semester over four years, you are likely to see multiple student loan accounts on your credit report. This may have a negative impact on your score, as it will appear as though you have several accounts, even if they are through the same lender. 

Federal or private student loan consolidation may be options to consider when you graduate.  Consolidation allows you to combine multiple loans into one, single loan.  However, be sure to ensure doing so will not substantially increase your overall cost of borrowing.

Will paying off my loans early hurt my credit score?

No. Contrary to what you may have read elsewhere, paying off your student loans early will not reduce your credit score – this is a myth. Banks do not harm your credit score for paying early, nor is the amount of interest you pay (or don’t pay) reported to the credit bureaus.

Am I penalized for not making payments during a forbearance, deferment or grace period?

The short answer is, no you won’t be penalized.  During a deferment, grace period or forbearance, you are not required by the terms of your loan to make payments.  Therefore, no negative activity will be reported to the credit bureaus. Federal loans offer you the option of deferring payment of loans while you are in school and enrolled at least half time. 

Many private lenders will allow you to defer payments while you are in school as well.  Once you graduate, government loans offer a short grace period in which no payment is required and many private student loans offer this feature as well. 

In addition, if you find you are having difficulty making your payments due to a financial hardship, and your lender approves you for a forbearance, you will not be reported for non-payment.  If you ever feel you may miss a payment for any reason, always contact your loan servicer or provider and let them know.  They will try to work with until you can get back on track.

Basically, if you make your regularly scheduled payments, or even pay off your student loans early, your credit history will remain in good standing. After you have paid off your college debts, your credit-to-debt ratio will improve and your score should go up. Never let your students loans slip into default status if at all possible. 

Not only will this damage your credit score, but it will be much more expensive to pay off your loans due to collection costs and actions such as wage garnishment are a real possibility.  Of course, the easiest way to avoid getting into this situation is to keep your debt to a minimum and only take out what you absolutely need for college. Do a little research to find the best student loan rates, borrow federal student loans first and don’t forget to check out possible scholarships!