5 Ways Student Loans Can Help – Or Hurt – Your Credit

do student loans affect credit

If you were to play a word-association game using the phrase, “student loans,” what are the first few words that come to mind? When I think of my debt load, my words are Frustration. Annoyance. Just the worst.

But when I just consider my student loans in general, the phrases are Educational funding. Opportunity. Credit-building.

Believe it or not, student loans aren’t all bad. If you feel that you’re about to be consumed with rage or sadness over them, remember this one fact: Done right, they can help you build credit.

Do student loans affect credit?

Even if some or all of your student loans are federal, they still represent money that has been lent to you and they do affect your credit.

If you’re handling your student loans well, that can lead to the establishment of good credit. Which, in turn, means you can pay less for all those other life goals you might have, such as buying a home or exploring the world for cheap using credit card travel rewards. All because you’re building up your credit score with student loan payments.

Just remember, your credit and credit score are both positively and negatively affected by your student loans, depending on how you’re handling repayment. So when asking yourself, “do student loans affect credit?” always know that the answer is a resounding “yes!”

Let’s dive into the how and why student loans affect your credit score.

Positive effects of student loans

1. Paying on time influences 35 percent of your score

Payment history dictates a large portion of your credit score. However, many things you make payments on, such as rent or car insurance, are never reported to the credit bureaus – until you stop paying them.

Ultimately, payments not reported to credit bureaus won’t help you build credit. However, student loan payments are reported and thus enable you to start establishing a payment history.

If you don’t have a credit card or an auto loan in your name, then paying student loans on time is a great way to start building credit from a young age.

2. Having loans makes it easier to build a credit mix

Credit mix is a slightly less impactful portion of your credit score at 10 percent. Credit mix simply refers to the mixture of credit you have. Essentially, you’ll do better in this area if you have more than one type of credit.

If you already have a credit card, then having student loans as well gives you a credit mix. That’s not to say that you need to get a credit card if you don’t have one. Again, this is only ten percent of your score.

3. Long repayment periods = long credit history

Length of credit history is a factor that influences 15 percent of your credit score. And since student loans often come with 20-year payment plans, having them will help you build a strong length of credit history.

Of course, if you have an opportunity to pay off your loans faster, you should take it. Affecting 15 percent of your credit score isn’t enough of a reason to stay in debt for longer than you have to be.

Negative effects of student loans

1. Paying late will also influence 35 percent of your score

Again, payment history is the single most impactful factor of your credit score. Therefore, it can hurt you as much as it helps you. That’s why payment history shows up in both our pro and con list.

Remember, if you pay your student loans late, you’re going to take a hit on your credit score. Plus, your servicers can report your delinquency as early as 30 days after your payment is due. So if you thought you could skip a month and not suffer any consequences, you thought wrong.

Never pay late on your student loans (or any bill for that matter) if you can help it. And if you have federal loans but can’t afford to make your payments, see if you qualify for an income-driven repayment plan.

If you have private student loans and need to lower your monthly payment, try to refinance them for more favorable terms.

2. Defaulting on your loans will greatly damage your score

While late payments are definitely not good (they stay on your credit report for seven years), accounts that have gone to collections look really bad on your credit report.

Like late payments, accounts in collections stay on your credit report for seven years – even if you paid them off since they went to collections. But accounts in collections mean a lot more to lenders than a late payment. They mean lost revenue.

For lenders, if they have to sell a defaulted account to collections, they do so for pennies on the dollar. Investopedia explains how this works:

Debt buyers often purchase these packages [of delinquent accounts] through a bidding process, paying on average 4 cents for every $1 of debt face value. In other words, a debt buyer might pay $40 to purchase a delinquent account where the balance owed is $1,000.

Creditors ultimately won’t want to give you money unless they have proof that they can trust you to pay it back. That’s what credit scores are all about: proof that you can handle debt responsibly. Default makes it look like they can’t trust you to repay a loan.

Going into default on your student loans will damage your credit score and, as a result, make it more difficult to obtain credit for other things for years to come.

If you fear you’re getting to that point, consider the same options stated above: income-driven repayment plans for federal loans and refinancing for private student loans.

Keep your student loans and credit score in good standing

As long as you stay current on your payments, student loans will help your credit score. By contributing to your payment history, credit mix, and length of history, your student loans cover three of the five main factors that determine your score.

Yes, student loans affect your credit score, but it’s up to you to make sure they continue to positively affect your score.

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