Do Student Loans Affect My Credit Score?

The COVID-19 pandemic prompted the government to pause federal student loan payments and temporarily eliminate interest. These advantages allow borrowers to save money on their student loans and pay them back as soon as possible. Loans from private lenders continue to incur interest.

Paying off loans confers multiple benefits, including qualifying for a home mortgage, building an emergency fund, and paying off credit card debt. Negative outcomes come to borrowers who become delinquent or default on their student loans. Bankruptcy does not automatically cancel student loan debt and borrowers face an uphill battle to discharge federal student loans during the proceedings. Bankruptcy affects an individual's credit score for seven years.

Loan forbearance and deferment provide relief to borrowers in need. Forbearance refers to when a lender pauses or reduces payments temporarily. A borrower must demonstrate financial hardship to qualify. Although beneficial in many ways, forbearance does not stop interest from accruing. Borrowers who choose this option end up owing more money.

Many students sign up for deferred private and federal loans, meaning borrowers do not start making payments until after graduation. Interest may accrue before graduation, depending on the loan. For both forbearance and deferment, loans appear on borrowers' credit reports but do not affect the score while in school.

The federal government excuses student loan debt in one of two ways. Forgiveness and cancellation refer to the same process wherein the government no longer requires repayment due to employment. Teachers who work for five years in a low-income school receive this benefit. Loan forgiveness and cancellation do not affect a credit score in most cases.

Like forgiveness and cancellation, discharge excuses borrowers from repaying student loans. However, discharge refers to outside circumstances including disability, school closure, death, and a false creditworthiness certification. Qualifying for discharge involves submitting financial documents to the federal government.

You do not need a credit history to get a student loan. If you apply for a private loan, you usually need a cosigner with a credit score of at least 670. The better the credit score, the lower the interest rate. If you apply for a federal student loan, you do not need a cosigner.

Your credit score may drop slightly after you pay off your student loan. Closing an account will take away some of the long repayment and credit history that has been positive for your credit score. It will also slim down your credit mix, which makes up a portion of your credit score. The temporary dip will naturally rise again as you continue to build credit.

If you defaulted on your student loan, it will remain in your credit history for seven years. Your responsibility to that debt does not disappear, but the debt will no longer damage your credit score.

No. Until you graduate and the deferment period ends, your student loan will not impact your credit score. The lender cannot report anything to credit bureaus until you start making payments. If you want to build credit while in school, you may want to open a credit card instead of waiting for student loan payments to begin.