How Do Student Loans Affect Your Credit Score?

You might not think about your credit score every day, but it has a huge impact on your life. Whether you’re applying for a credit card, in need of a new car, or buying a home while paying down student debt, your credit score will determine whether you qualify what interest rate you’ll pay.

Debt is one of the many factors that determine your credit score. So, do student loans affect your credit score? You bet! However, you might be surprised to learn that the effects can be both positive and negative.

This guide will explain the relationship between your student loans and your credit score, and how you can keep your score healthy even while carrying student loan debt.

In this guide:

What factors impact your credit score?
How do student loans affect your credit score?
Student loans affect your cosigner’s credit, too
Parent PLUS Loans affect your parents’ credit score
Don’t take out a student loan just to build credit

What factors impact your credit score?

Your credit score is a representation of your risk level. A higher score signals that it’s likely you can and will meet your repayment obligations when you borrow money. A lower score suggests you might not.

Each major credit bureau and credit reporting agency evaluates risk and determines scores based on its unique formula. However, you can be sure the following five factors will usually be considered, including in your FICO score, a common credit-scoring model:

Payment history: This is one of the most influential factors and can be responsible for up to 35% of your score. If you pay all your bills on time every time, you will likely reap the benefits through a good score. If you consistently make late payments, your score could go down.
Credit Utilization: Your credit utilization, or how much of your available credit you use, is also a major factor. For instance, if you have a credit limit of $10,000 and your existing balance is $4,000, your utilization is at 40%. If you want to improve your score, keep your credit utilization below 30%.
Types of credit: There are two types of debt: revolving and installment. Revolving debt refers to things like credit card or store financing accounts. Installment loans are things like student loan debt, mortgages, auto loans, and personal loans. A healthy mix of both can help your credit score, but revolving debt is considered riskier.
Length of credit history: This refers to the age of your credit accounts. Older accounts that are in good standing indicates that you have a history of responsible debt management. Though a single new account might not adversely affect your credit, too many of them—and not enough mature accounts—can damage your score.
Credit inquiries: When you apply for credit or, in rare cases, request a quote on a loan or line of credit, the lender will perform a hard credit inquiry. Hard inquiries stay on your credit report for two years, and too many of them in a short period can damage your score.

How do student loans affect your credit score?

For better or worse, your student loan accounts contribute to your credit score. But how they affect your score depends on how you manage your debt. Understanding how your loans can affect your credit score can help you improve and maintain your score.

Positive effects of student loans on your credit score

The general rule of thumb is that less debt is better, but student loan debt doesn’t mean you’re destinated for a poor credit score. Here are a few things you can do to leverage your student loans to improve your credit.

Payment history

One of the best things you can do to improve and protect your credit score it to make regular on-time payments, including on your student loans. By making on-time payments, you can contribute to your positive repayment history. This shows lenders you are a responsible borrower.

This is particularly important for young borrowers who don’t have other accounts, like credit cards or personal loans. When that’s the case, the student loan payment could be your only indicator of responsible debt management.

Credit mix

If you have credit cards or store accounts, which are considered revolving credit, your student loans could help diversify your types of debt.

Negative effects of student loans on your credit score

Student loan debt can help you build credit and improve your score, but only when it’s well managed. There are times when a student loan can adversely affect your credit. To protect your credit and avoid a falling score, avoid making these mistakes.

Late payments

If you’re making regular payments, you might see a lift in your credit score, but if you make late payments, your score will likely suffer. Repeatedly missing payments, especially over a long period of time, signals to lenders that you’re unable or unwilling to make your payments.

In addition to the impact on your credit score, you’ll also likely need to worry about late-payment penalties, which can add to your overall debt.

If you do miss a payment, make every effort to submit it as soon as possible. Lenders don’t typically report missed payments that are a few days late, but they will report payments that are not made within a designated period. For federal student loans, that’s typically 90 days.

Though private lenders have their own policies, they can report your account for being as little as 30 days past due.

To make sure you pay on time, sign up for autopay. Once you sign up, your payments will automatically be deducted from your bank account at the same time every month. Many loan servicers even offer an interest rate reduction for borrowers who sign up for autopay, which can help you save.

The potential for default

If you miss enough payments, your loan can go into default status. To lenders and credit reporting agencies, student loan default serves as a big red flag, suggesting you aren’t able to or don’t care to manage your financial obligations.

Many students struggle with their loan payments, and there’s no shame if you can’t quite manage the monthly payments. However, if you’re having trouble making your payment, contact your lender or loan servicer to discuss your options.

For federal student loans, you have access to a variety of solutions, including income-driven repayment plans or momentary pauses in payment (e.g. deferment or forbearance).

Many private lenders offer deferment options, as well, or you could attempt to reduce your interest or monthly payments through or student loan refinancing.

Having a high DTI ratio

Your debt-to-income (DTI) ratio refers to your debt payments as they relate to your income. Your DTI is determined by adding up all your debt payments, such as car loans, student debt, and credit cards, and dividing that number by your gross monthly income.

For instance, if you have $1,600 in monthly debt payments and your monthly income is $4,500, your DTI would be 0.36 or 36%. A $300 student loan payment would increase your DTI to 42%.

The lower your DTI, the better, and financial service companies typically prefer a DTI below 36%. DTI ratios above that will make it hard to get things like loans or credit cards, and when you can, you’ll likely receive higher interest rates.

Student loans affect your cosigner’s credit, too

Many students need or choose to add a cosigner to their application for private loans. A cosigner agrees to take full responsibility for student loan repayment if the primary borrower doesn’t meet their repayment obligations.

Lenders welcome this extra layer of security and will often require it for approval or, if you’re approved on your own, allow you to use a cosigner to reduce the interest rate.

Because cosigners take responsibility for the loan, they are on the hook for missed payments. As such, missed payments on your part can damage their credit score.

Many lenders have a cosigner release policy, which will effectively remove the cosigner from the loan after a set number of on-time payments (e.g. 48 payments). Ask about your lender’s cosigner release policy, and talk to your lender and cosigner to determine the best time to exercise that release.

Parent PLUS Loans affect your parents’ credit score

Cosigners aren’t the only ones who might have their credit on the line for your loan. Parents who take out a federal Parent PLUS loan do so using their name and Social Security number.

That means the loan is primarily tied to their credit profile and any repayment activities, on-time or late, will directly impact their credit.

If your parent or guardian took out a Parent PLUS loan to finance your schooling, the debt won’t show up on your credit history and therefore won’t negatively or positively affect your score.

Don’t take out a student loan just to build credit

With low interest rates and predictable payments, you might wonder whether taking out a student loan is a smart way to build credit. It’s true that, when managed responsibly, a student loan can help you establish a positive credit history.

However, the only time you should take out a student loan is when you need to use the funds to finance your education.

If building your credit is your primary goal, then consider leveraging a student credit card instead.

Student credit cards

Compared with a student loan, a student credit card offers more flexibility with less red tape. You won’t be held to a lengthy repayment plan, and there is no minimum amount you need to spend. Therefore, it’s typically a better way to build a strong credit history.

There are plenty of credit cards out there, but a student credit card is tailor-made to meet the needs of, well, students.

These cards typically don’t have annual fees and often have less stringent qualification requirements compared to the average consumer credit card. That makes it easier for students, many of whom haven’t had the opportunity to build credit, to qualify.

>> Read more: Best Student Credit Cards

Other perks

Many student credit cards also offer additional perks, like welcome offers for new members and rewards programs that allow you to earn points, miles, or cash back, the likes of which you could redeem for everything from trips to gift cards.

Things to keep in mind

If you decide a student credit card is right for you, keep in mind the five credit score factors above. When you make regular payments and keep credit utilization low, a credit card can help you build your score.

If you fail to do those things, your score will drop. And, over time, if you continue to run up credit card debt, interest and fees can make it harder to improve your credit or get out of debt.

Bottom line: Student loans can help or hinder your credit score

When you’re trying to build credit, student loans might seem like a hurdle. But they don’t need to be.

When managed properly, your student loans can help you build a positive repayment history and diversify the types of credit that show up on your credit report.

Of course, as is the case with any type of debt, late payment can damage your score.

To keep your score in check, pay on time every time. If you run into trouble, contact your lender or loan servicer and ask about your repayment options.