How Student Loan Debt Affects Your Credit Score

student loan debt

Does Your Student Loan Debt Affect Your Credit Score?

Student loans are a very common type of debt if you’ve attended college or universities. They often take many years to repay because of the size of the loan and the payment structure. So if you have student loans or are considering getting a student loan it is important to know how and when they affect your credit score.

Here is a look at how your student loan payment history, debt-to-income ratio, and student loan cancellation and forgiveness affect your credit score.

student loan debt

How Student Loans Can Affect Your Credit

Student Loan Payment History

Student loans, like other types of consumer debt, are reported to the three major credit bureaus. If you make your student loan payments before the due date, you will establish a good credit history, and that will improve your credit score.

Private and public loans both appear on your credit report. The three credit bureaus – Experian, Equifax, and Transunion – do not weigh public or private loans more heavily than the other, so late payments on either lower your credit score equally. There is a distinction as to how private and public student loans can be paid off, and this is where the difference is most important from a credit history perspective.

Debt-to-Income Ratio

Of course, student loans need to be paid off like any other debt, and the amount of your student loan monthly payments is factored into your debt-to-income ratio.

While this figure isn’t directly a factor in your credit score, it does play an important role when lenders consider extended mortgages, car loans, personal loans, and business loans to applicants, so it’s something you should keep in mind.

A high debt-to-income ratio caused by a lot of student loans makes it harder for you to qualify for other types of loans until those student loans are paid off.

Reducing or Eliminating Payments

Student Loan Cancellation and Forgiveness

There are some rare cases in which student loans are cancelled or forgiven, usually as a fringe bonus for people who sign up for volunteer or military service, or for others in specific occupations.

Loans can also be forgiven in other situations of extreme financial and legal hardship.

From the credit bureaus’ perspective, student loan cancellation and forgiveness all looks the same:

It’s a debt discharge caused by non-credit factors, and loan forgiveness does not have any impact on your credit score.

However, picky lenders may ask why the loans were canceled before granting a mortgage or personal loan. – via

Other Aspects of Student Loan Debt

Hopefully you will make all of your payments on time and your student loan debt will help you increase your credit score. However, if something happens there are options. Here’s a look at how delinquency and deferment of student loan payments can affect your credit score.

student loan debt

Delinquency And Deferment

Resolve any delinquency immediately. Although it can harm your credit score to pay off too quickly, the damage will be much worse to just leave a student loan delinquent in the hope that you will find a new job or another source of income in order to “catch up”.

Once you resolve a delinquency by establishing an Income Based Repayment, Income Contingent Repayment or another repayment option, your credit rating will quickly begin climbing back to its pre-delinquent level.

Student loans taken out with a private lender have fewer repayment options than a federal student loan.  Even so, most banks will work with you to help not just you and your credit score, but to keep “bad” loans off of their books.  No bank manager or loan officer wants to have to answer about why a loan is delinquent and have to go through the process of attaching paychecks if they can find a solution agreeable to both parties.

The key here is to notify your lender before you miss a payment and to set up a new repayment plan.  If it is too late for that, then you will need to establish a new repayment plan quickly and follow up with the lender and the credit reporting agencies to make sure any bad information about it has been updated to show a repayment plan is now in place.

A student loan in deferment or forbearance will NOT hurt your credit score. Payments are not required when a loan is deferred, so you cannot be late in making them. If you need a short term of relief from a student loan to get your finances back on track, or to deal with an unexpected expense such as an extended hospital stay, then this is definitely an option for you.
– via Student Debt Relief | Student Loan Forgiveness

Do you have a good payment plan for your student loan debt?

Leave a Comment