Can Paying Off Student Loans Help Your Credit Score? Not Always

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Originally published Oct. 16, 2017

We know that falling behind on student loan payments can wreck a credit score. But my circumstances prompted another question — can paying off student loans help credit?

After paying off one of my student loans, I got a notification that there was a slight decrease in my credit score. I’d felt so good about paying off one of my loans in its entirety, but this achievement suddenly felt like a mixed blessing.

It led me to wonder how paying off student loans affects your credit score, whether in a positive or negative way. What I found was that both outcomes are possible.

To explain why, let’s look at the following topics…

Does paying off student loans help your credit score?
Why paying off your student loans early can hurt your credit score
Paying off student loans early is still a good move
What will happen to my credit score?
Bottom line: Timely student loan repayment is key

Does paying off student loans help your credit score?

Believe it or not, my student loans have mostly affected my credit score in a positive way. Up until two years ago, my student loans were my only source of credit. Thanks to on-time, in-full payments (your payment history makes up 35% of your FICO® Score), they led me to a good score of 720.

But I was a little worried when my credit score went down slightly after I paid off one of my student loans. After I did some research, I found out that paying off your student loans can impact your credit score, even if only moderately.

But why?

Why paying off your student loans early can hurt your credit score

You may be scratching your head wondering why on earth would your credit score go down when you’ve achieved this difficult financial goal. Shouldn’t paying off your student loans help your credit score rather than hurt it?

It comes down to this: Your student loans are considered installment loans, and these can add variety to the mix of your credit portfolio. Installment loans are different from credit cards, which are considered revolving credit.

Having a mix of accounts can help your credit score. In fact, credit mix accounts for 10% of your FICO Score.

The idea here is that your credit mix proves your ability to manage different types of credit. So if you don’t have other installment loans, such as a mortgage or a car loan, your credit mix will show less variety once your student loans are removed.

While 10% may not be a lot in the big picture, if you don’t have a lot of other credit history or a diverse mix of credit, you may see a slight decrease in your credit score. In other words, although paying off your student loans early makes financial sense, it can sometimes come with a small ding to your credit score.

Paying off student loans early is still a good move

This doesn’t mean you should hold on to student loans for the sake of your credit. Knocking out your student loans can free up your extra money and lower your debt-to-income ratio, which also benefits your financial situation and can make it easier to qualify for another type of loan, such as a mortgage. All in all, retiring your student debt is still a good move.

“Paying off a student loan, like any other loan, is a positive step in building a strong credit history,” said Rod Griffin, director of Public Education at Experian, one of the three national credit bureaus. “Doing so demonstrates you are responsible in managing your debts, which is essential to qualifying for new credit accounts.”

So even if your credit score drops slightly from closing out a student loan account, doing so will still likely benefit you financially in the long run. The only reason to delay would be if you need the strongest credit possible to qualify for a mortgage or similar product.

Another reason is if you have other debt with higher interest rates, such as credit card debt, that you wish to prioritize first. If these reasons don’t apply to you, it’s probably in your best interest to pay off your student loans as fast as you can, even if your credit score will take a temporary dip.

What will happen to my credit score?

When I saw that my credit score had dropped a little from paying off just one loan, I wondered what would happen to my credit score once all my student loans were gone. Should I expect an even steeper drop, or would my credit score remain as is?

Unfortunately, there’s no easy way to project exactly what will happen to your credit score once you’re done paying off your student loans.

“It’s impossible to say if or how much repaying student loans will affect your credit score,” said Griffin. “It depends on the individual’s unique credit history and the particular scoring model being used.”

He noted that there are many variables that go into calculating your credit score. Your FICO Score is comprised of the following:

  • Your payment history (35%)
  • Amounts owed (30%)
  • New credit (10%)
  • Length of credit history (15%)
  • Mix of credit in use (10%)

As you can see, your payment history accounts for the largest part of your FICO credit score. If you’ve made on-time payments on your student loans, that will reflect positively on your credit score, even if you also pay off those loans and no longer have an installment loan in your credit portfolio.

Bottom line: Timely student loan repayment is key

Paying off your student loans as soon as possible makes a lot of financial sense, but be aware of how it may affect your credit score. You could potentially see a slight drop in your credit score, but probably not a significant one — and without your student debt weighing you down, you’ll be able to make other positive financial decisions that could improve it in the long run.

One of the best things you can do to maintain a positive credit score is to pay your student loans on time. Paying off your student loans will result in some closed credit accounts, but that positive payment history will still be there and show lenders that you are a responsible borrower.

Also remember to regularly check your credit report and monitor your credit score. You can get your free credit report from the three major agencies at AnnualCreditReport.com, and can monitor your score using various online services at no cost.

Rebecca Safier and Jamie Cattanach contributed to this report.

Interested in refinancing student loans?

Here are the top 9 lenders of 2021!
LenderVariable APREligible Degrees 
1.89% – 6.15%1Undergrad
& Graduate

Visit Splash

1.99% – 5.64%2Undergrad
& Graduate

Visit Earnest

1.99% – 6.84%3Undergrad
& Graduate

Visit CommonBond

1.91% – 5.25%4Undergrad
& Graduate

Visit Lendkey

2.25% – 6.53%5Undergrad
& Graduate

Visit SoFi

2.15% – 4.42%6Undergrad
& Graduate

Visit PenFed

1.89% – 5.90%7Undergrad
& Graduate

Visit Laurel Road

2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

2.00% – 5.63%8Undergrad
& Graduate

Visit Nelnet Bank

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 3, 2021.


2 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of October 26, 2020, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 10/26/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.


3 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. ‍All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.


4 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it  endorse,  any educational institution.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.


5 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: 1. Fixed rates from 2.99% APR to 6.99% APR (with AutoPay). Variable rates from 2.25% APR to 6.53% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.12% plus 2.38% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The discount will not reduce the monthly payment; instead, the interest savings are applied to the principal loan balance, which may help pay the loan down faster. Enrolling in autopay is not required to receive a loan from SoFi. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score.Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

6 Important Disclosures for PenFed.

PenFed Disclosures

Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.15%-4.42% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.


7 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of January 4, 2021. Information and rates are subject to change without notice.
 


8 Important Disclosures for Nelnet.

Nelnet Disclosures

Credit Score

Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.

Auto Debit

Interest rate reduction of .25% for automatically withdrawn payments from any designated bank account (“auto debit discount”). Auto debit discount applies when full payments (including both principal and interest) are automatically drafted from a bank account. The auto debit discount will continue to apply during periods of approved forbearance or deferment if the auto debit discount was in effect at the time of receiving the forbearance or deferment. Auto debit discount will remain on the account unless (1) the automatic deduction of payments is canceled or (2) there are three consecutive automatic deductions returned for insufficient funds at any time during the term of the loan.

Cosigner Release

Request for the cosigner to be released can be made by the borrower after 24 consecutive, on-time payments (not later than 15 days after the due date) of principal and interest have been made. Borrowers in deferment or forbearance must make 24 consecutive, on-time payments after re-entering repayment to qualify for the release. The borrower must be current on their payments at the time of the cosigner release request and show the ability to assume full responsibility of the loan(s) by meeting certain credit criteria on their own at the time of the request, including, but not limited to, being a U.S. citizen or having permanent residency in the United States, being the age of majority in their permanent state of residency, providing sufficient proof of income, and having no student loans in default.

Hardship Protection

Hardship forbearance allows you to temporarily suspend payments on your loan(s) while you are experiencing financial hardship. It is offered in increments of two or three months, with a maximum of 12 months available, in aggregate, over the life of the loan. If your loan(s) are in good standing at the time of your request, you will be eligible for forbearance in increments of two monthly payments. If, at the time of your initial request, your loan(s) are considered past-due, you will be eligible for forbearance in increments of three monthly payments. Future increments of forbearance, up to a life-time maximum of 12 months, may be requested upon the completion of making a certain number of principal and interest payments. During the two- or three-month forbearance period, you will not be required to make payments; however, any unpaid interest will continue to accrue and will be capitalized (added) onto your principal balance at the end of the forbearance period. You may continue making payments in any amount without penalty during the forbearance period. Your loan repayment term will be extended by the number of months in the forbearance period.

Loan Eligibility

Refinance Loan Eligibility: You must be a U.S. citizen or permanent resident alien with a valid U.S. Social Security number, and be the legal age to enter into binding contracts in your permanent state/territory of residency, or be at least 17 years of age and apply with a cosigner who is at least the age of majority in their state/territory. Non-residents can apply with an eligible cosigner who is a U.S. citizen or permanent resident alien with a valid U.S. Social Security number. The student loans you refinance must be in their grace or repayment period, and you can no longer be enrolled in school on a half-time or more basis. You must have at least $5,000 in student loans to refinance. You, or your eligible cosigner, must have an annual income of at least $36,000. Approval subject to credit review. Other credit criteria may apply.

Refinance Loan Limits:

  • Minimum loan amount: $5,000
  • Maximum student loan limits:
    • $125,000 for borrowers with an undergraduate degree.
    • $175,000 for borrowers with a graduate or doctorate degree.
    • $175,000 for borrowers with an MBA or graduate law degree.
    • $500,000 for borrowers with a graduate health professions degree.

Loan Refinancing Risks: Federal student loans include benefits that may not be offered with private student loans. Carefully review any potential benefits that may be lost by refinancing federal and private education loans, such as the loss of any remaining grace periods. To learn more about what to take into consideration when refinancing federal student loans with private education loans, click here

Interest Rates

Selecting ‘Get Started’ results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.

Refinance Loan

Fixed interest rates range from 2.99% APR (with auto debit discount) to 6.25% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. The fixed interest rate will remain the same for the life of the loan.

Variable interest rates range from 2.00% APR (with auto debit discount) to 5.63% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. Variable rates may increase after consummation. The variable interest rate is equal to the One-Month London Interbank Offered Rate (“One-Month LIBOR”) plus a margin. The One-Month LIBOR in effect for each monthly period (from the first day of the month through and including the last day of the same month) will be the highest One-Month LIBOR published in The Wall Street Journal “Money Rates” table on the twenty-fifth (25th) day (or if such day is not a business day, the next business day thereafter) of the month immediately preceding such calendar month. The Annual Percentage Rate (APR) for a variable interest rate loan will change monthly on the first day of each month if the One-Month LIBOR index changes. This may result in higher monthly payments. The current One-Month LIBOR index is 0.15% as of 5/4/2021.

The lowest interest rate for each loan type requires automatically withdrawn (“auto debit”) payments, a five-year repayment term, and the borrower making immediate principal and interest payments. Not all borrowers will receive the lowest rate. The interest rate and Annual Percentage Rate (APR) may be higher depending upon (1) the credit history of the borrower and, if applicable, the cosigner, (2) the repayment option and loan term selected, (3) the loan type selected, and (4) the highest level of education attained. If approved, applicants will be notified of the rate qualified for within the stated range.

*Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score. **Your actual savings may vary based on interest rates, outstanding balances, remaining repayment terms, and other factors.