How do student loans affect credit scores?

Student loans might make paying for higher education both possible and affordable. But like all loans, they can impact credit-scoring factors such as total debt, credit mix and payment history. 

Here’s more about why and how both federal and private student loans could impact your credit scores, even years after you graduate.

Key takeaways

• When you pay your student loans on time, it can help establish and maintain a good payment history, which can help your credit scores. But if you miss a payment or pay late, your scores could take a hit.
• When you apply for federal student loans, you typically won’t have to worry about a credit check, but private lenders may perform hard credit checks, which can lower your credit scores.
• When you pay off your student loans, you might see a temporary drop in your credit score since you’re changing your credit mix. 
• Completely paying off your student loans can be helpful for your finances since you’re lowering your debt-to-income (DTI) ratio.

Student loans function like other loans, so they can impact your credit in similar ways. Here are a few reasons why you may see a change in your credit scores once you take out a student loan.

Your credit history can include the length of time you’ve been responsible for some type of debt or credit. The longer you’ve demonstrated good financial habits—like making on-time payments—the better your credit scores might be. 

If you haven’t already established credit, a student loan might be the beginning of your credit history. When you make payments, your lender will usually inform the three credit bureaus. On-time payments can help build a positive credit history, which can increase your credit scores over time. Keep in mind that it usually takes three to six months to get your first credit score. 

Your credit mix is the combination of all your debt. It’s an indication of how a person handles different types of debt, including installment loans, like student loans, and revolving credit, like a credit card. 

Having student loans could help give you a better credit mix. According to credit-scoring company FICO®, lenders may see you as a less risky candidate if you’ve shown you can manage different types of loans and lines of credit. But that’s only if you’re keeping up with payments and paying all your accounts on time. 

When you apply for private student loans, they will generally require a credit check, while federal student loans usually won’t. To gauge whether borrowers will likely make their student loan payments on time, private lenders will use a hard credit inquiry to gain a better understanding of your creditworthiness. 

Keep in mind that these hard credit inquiries likely won’t cause your score to drop more than a few points. As long as you make payments on your student loans and any other debts you may have on time, you could see your score go back up.

Once you completely pay off your student loans, you may see a temporary decrease in your credit scores. This is because you’ll be changing your credit mix, and if you have a less diverse mix of loans, your score could drop slightly at first.

Paying off your student loans can also affect your DTI ratio, which compares the amount of debt you have to the amount of money you’re earning. While DTI ratio isn’t a credit-scoring factor, a lower DTI ratio could show prospective lenders that you’re a responsible borrower and increase your chances of qualifying for any future loans or credit accounts. 

Defaulting on a student loan can negatively affect your credit scores. This is because it means you’re failing to repay the loan in full. 

Remember, lenders typically report your payments to the credit bureaus. And if your payment is late, you miss payments or you aren’t paying your loan off according to the terms you originally agreed to, that information will be reported. That can result in a negative or derogatory mark on your credit report. The more negative marks you have on your credit report, the more likely you are to have lower credit scores. You may also find it more difficult to qualify for new loans or new lines of credit, like a mortgage or credit card, even years later.

Defaulting on your student loans could result in some of the following situations: 

• Owing the rest of your unpaid loan balance immediately
• Your employer withholding some of your pay for the loan holder
• Being taken to court by the loan holder
• Your tax refunds or federal benefits being withheld 

Co-signing on a student loan can have an impact on your and your co-signer’s credit scores. For the co-signer, the loan will show up on their credit report as if they’re the primary borrower. So if you make on-time payments, that can have a positive effect on both of your credit scores. And if you stop making payments, it could negatively affect both of your credit scores. If there’s a hard credit check when you apply for a loan, it can also affect both your and your co-signer’s credit scores.

When you consolidate your student loans, you combine several loans into one new loan with one monthly payment and one interest rate. 

Federal student loans can be consolidated with a Direct Consolidation Loan, which doesn’t require a hard inquiry. It may not lower your interest rate, but it’ll result in a fixed interest rate, so you won’t have to worry about it changing as you pay off the loan. You may also have lower monthly payments and access to federal forgiveness programs.

Private lenders aren’t required to offer loan consolidation. Many offer refinancing, which could help you get a lower interest rate and potentially pay off your loans faster. However, the interest rate could be variable and change over time. And to refinance, you’ll need to apply for a new loan, which typically triggers a hard credit check and can cause your score to drop temporarily.

When you take out student loans, they’ll affect your credit scores. That’s because they’ll appear on your credit reports. Making payments on time and increasing your credit mix can have positive effects on your credit scores. But not paying off your student loans—or defaulting on them—can negatively affect your credit scores. 

Looking for ways to monitor your credit so you can make sure you’re on the right track and see how student loans can affect your credit scores? Sign up for CreditWise from Capital One. It’s free, even if you’re not a Capital One cardholder.