Do Student Loans Affect Credit? All You Need to Know
Yes, student loans do affect your credit standing. In fact, there is little difference between the credit-building capabilities of a student loan and a standard personal loan. Your lender will report account information to the major credit bureaus each payment period, thereby adding positive information to your file and thus boosting your score – assuming you pay as agreed.
There are, however, certain circumstantial differences that set student loans apart from other types of loans and lines of credit. For example, while the fact that you have a student loan will be noted on your major credit reports during school, federal student loans don’t begin reporting payment information to the major credit bureaus until you have graduated and the deferment period ends. To learn more about building credit with a student loan, continue reading below.
The most apt comparison one can make to a student loan is undoubtedly a standard personal loan. Both result in unsecured debt and they serve parallel purposes. And while a student credit card (i.e. a line of credit) is the other primary credit-building tool available to young people, loans and lines of credit serve distinct needs and function quite differently.
The comparison below focuses on federal student loans and personal loans. Private student loans will resemble a personal loan even more, as they cannot exercise the same federal powers as Uncle Sam.
|Federal Student Loan||Personal Loan|
|Popularity||$1.1 trillion in outstanding student debt.||$26 billion in outstanding personal loans.|
|APR||4.66% - 7.21%||5.99% - 9.99%|
|Cost Subsidy||Gov. covers interest on Federal Direct Subsidized Loans while borrowers are in school (at least half-time) and during the deferment period.||None|
|Can be Used to Pay Student Expenses||Yes||Yes|
|Can be Used to Pay Non-Student Expenses||No||Yes|
|Payment Flexibility||Borrowers may be eligible for a number of different repayment plans, including amounts tied to their monthly income.||None|
|Deferment Period||Borrowers are not responsible for payments while in school (at least half-time) and for 6-9 months after graduation.||Payments begin immediately.|
|Default||Not really an option.*||Yes, upon becoming 180 days delinquent.|
|Discharge in Bankruptcy||Difficult, must prove undue hardship.||Far easier than student loans.|
* While people often talk about defaulting on a student loan, the truth is you cannot technically do so given that your debt won’t be written off or forgiven (except through certain government programs)
Student Loan Payment Scenarios
As mentioned above, student loans do not begin monthly reporting to the three major credit bureaus (Experian, Equifax and TransUnion) until you begin making post-graduation payments. It is important to note, however, that you don’t need to begin making payments immediately upon graduating. That’s because of student loan deferment, which typically gives student borrowers 6-9 months (but up to three years in some cases) after graduating to begin paying down amounts owed.
With that being said, the manner in which you handle student loan payments is very important, as Payment History accounts for roughly 35% of your overall credit score, making missed payments on any loan or line of credit detrimental to your credit standing and, ultimately, quite expensive.
- If You Make On-Time Payments: Positive information will be infused into your credit files, creating a track record of responsible money management and endearing confidence among future lenders.
- If You Miss a Payment or Two: Don’t worry. It’s not the end of the world. A single missed payment probably won’t even be reported to the credit bureaus, although two consecutive missed payments probably would be, thus causing a minor hit to your credit standing. The most important thing is to learn from your mistakes and never miss a payment moving forward.
- If You Habitually Miss Payments: A track record of irresponsible money management will be established, causing serious damage to your credit and engendering concern among potential lenders. In such an instance, you should consider applying for student loan forbearance. This allows you to stop making payments, or pay a decreased amount, for up to a year during times of financial difficulty.In cases of “undue hardship” borrowers may also be able to discharge certain student loan debts through Ch. 7 Bankruptcy. Take a look at our Student Loans in Bankruptcy Guide for specifics.
If You Default: Federal student loans, like most debt owed to Uncle Sam, will follow you to the grave. It is very hard to discharge student debt through bankruptcy, and there is no limit to the length of time this type of negative information can remain on your credit reports.As a result, you may be wondering what default actually means in the context of student debt. Well, most federal student loans will be passed on to the U.S. Department of Education’s Default Resolution Group for collection if you fail to make a payment after 270 days.
You have three options at that point, according to the government: 1) repayment; 2) loan rehabilitation; and 3) debt consolidation. Uncle Sam may also decide to employ administrative wage garnishment, which does not require a court order, to recoup amounts owed. You’ll receive to first send you a 30-day notice, however.
- Paying Off Your Debt Early: Contrary to what many people will tell you, you can and should pay off your student debt in full as soon as possible. While this will result in one fewer tradeline reporting to the major credit bureaus, you can replace it with a no fee credit card. As long as you don’t revolve a balance, you’ll be getting similar credit building benefits without spending any money.Besides, as long as you have an open credit card account in good standing, you’ll be able to add positive information to your major credit reports on a monthly basis. Credit cards are far more efficient than student loans at this task anyway.
Tips for Student Loan Credit Success
Student loans certainly do have their fair share of do’s and don’ts. What follows is a collection of best practices advocated by our experts.
- Pay In Full If You Can: This is important enough to reiterate, especially considering how many educational articles get this wrong. Always pay in full if you can. Your interest savings will outweigh the lack of student loan information flowing into your credit reports, which can easily be replaced with plastic.
- Make Sure You Have a Credit Card: Again, responsibly using a credit card – always paying on time and never maxing out – will result in an influx of positive information into your major credit reports.
- Minimize Non-Student Debt: Your main priorities at this stage in your financial life should be to save as much as possible and cost-effectively build credit. Student debt is a necessity, as it is an investment in your future, but you should avoid all other types of debt at all costs.
- Plan Ahead: Having a plan is essential to financial success. With that in mind, you’ll need to set a goal for paying off your student loans and use that to reverse a budget, or plan for achievement.
- Schedule Payments: Don’t allow forgetfulness to threaten your credit. Instead, schedule payments from a bank account and make sure there is plenty of cash to cover the withdrawals.
- Review Monthly Statements: This is a skill that will pay dividends throughout your financial adulthood. It enables you to spot erroneous charges, payments you’re not credited for, signs of fraud, etc.
- Check Credit Reports Quarterly: Checking one of your major credit reports each quarter will allow you to mitigate the effects of fraud and easily dispute errors.
- Search for Grants & Scholarships: The more college you need to finance, the more you’ll pay in interest and the greater the likelihood of mistakes will be. So, search high and low for free ways to reduce your educational burden.
- Get a Job: Building both an emergency fund and a little student loan repayment nest egg while still in school will give you an excellent head start when the due dates start rolling in.
- Improve Financial Literacy: The more you can learn about personal finance while you’re young, the better off you’ll be. Not only will you learn about the wonders of compound interest and the value of a good credit score, but you’ll equip yourself with the mental tools needed to make sound financial decisions in any situation. Test your WalletLiteracy on our sister site, WalletHub.
- Keep an Open Ear: Always be on the lookout for new student loan repayment options, enticing balance transfer offers and any other news that impacts your student loans. From debt forgiveness programs to 0% rates, there’s a lot of valuable scuttlebutt out there.
Ask the Experts
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