How Do Student Loans Impact Credit Score

Last Updated on May 19, 2022

Student loans can have a negative impact on your credit score, but it depends on how you manage them.

Student loans are considered to be installment debt, which means that you’re required to make monthly payments over time until the debt is repaid. They are also categorized as “non-mortgage,” meaning they don’t qualify as collateral for a mortgage loan. This makes student loans more difficult to pay off than other types of debt like credit cards and car loans because they don’t have any collateral value.

You can see why this might cause some problems with your credit score—you’re unable to pay off the loan in a lump sum or refinance it like other types of debt would allow you to do. If you don’t keep up with your monthly payments, then your lender will report it as missed payments and this can hurt your credit score over time as well.

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How Do Student Loans Impact Credit Score

Yes, having a student loan will affect your credit score.

Your student loan amount and payment history will go on your credit report. Making payments on time can help you maintain a positive credit score. In contrast, failure to make payments will hurt your score. Establishing a good credit history and credit score now can help you get credit at lower interest rates in the future. If you think you may not be able to make your payments, contact your servicer to find out more options.

Student loans affect your credit in much the same way other loans do — pay as agreed and it’s good for your credit; pay late, and it could hurt it. Student loans, though, may give you extra time to pay before you are reported late.

Student loans are generally installment loans — you pay a specified amount for a certain time period. The lender reports this to credit bureaus, and you begin to establish a track record.

If you pay on time, every time, you’ll begin to establish a solid record of managing credit.

Here’s what you need to know about how student loans can affect your credit score.

If you pay late or skip a payment

Forgetfulness happens, and a brief bout won’t impact your credit. Your score will start to drop only after your lender reports your late payment to one or — more likely — all of the three major credit bureaus.

How long before it’s reported depends on the type of loan you have:

  • Federal student loans: Servicers wait at least 90 days to report late payments.
  • Private student loans: Lenders can report them after 30 days.

However, lenders can charge late fees as soon as you miss a payment.

If your lender does report your late payment, also known as a delinquency, it will stay on your credit report for seven years.

The more overdue your payment, the worse the damage to your credit. For instance, your federal student loan will go into default if you don’t make a payment for 270 days. That will hurt your credit even more than a 30- or 90-day delinquency.

If you cannot pay your student loans

Sometimes money gets tight. In those situations, ask your lender about lowering or pausing your monthly student loan payments. You might be able to:

  • Sign up for an income-driven repayment plan if you have federal loans.
  • Apply for a modified payment plan if you have private loans and your lender offers this option.
  • Enroll in deferment or forbearance to temporarily pause your monthly payments.

Changing the terms of your loan does not hurt your credit. As long as you handle payments as agreed — even if that means paying $0 per month — your credit score shouldn’t suffer.

Does Student Loans Affect Buying A House

With current mortgage rates at historic lows, you may want to consider buying a home soon if you are ready to take that step. But if you have student loan debt, you may be wondering whether it could affect your ability to get a great deal on a mortgage, or even to buy a home at all. While it is true that too much existing debt is likely to affect your interest rate and even whether you qualify for a mortgage, in most cases you can – and should – still consider buying a home if you are ready.

Student loans don’t affect your ability to get a mortgage any differently than other types of debt you may have, including auto loans and credit card debt. When you apply for a mortgage, your lender will assess all of your existing monthly payment obligations, including student loans, to determine whether you would be able to manage the additional monthly payment. Depending on your situation, the lender will decide whether you qualify for the new loan, and if so at what interest rate.[ 

For that reason, you should consider how both your monthly student loan payment and a hypothetical mortgage payment could affect your debt-to-income ratio and overall credit score before you apply for a mortgage. In other words, if you have any existing debt, you need to be careful that you will be able to manage all your monthly payment obligations with your current income.

This calculation varies a bit depending on the type of mortgage loan you choose.

Potential homebuyers can choose between a conventional mortgage from a private lender, like a bank or other financial institution, or an FHA loan, which is a mortgage backed and insured by the Federal Housing Administration for people with limited savings or lower credit scores. This backing enables the lender to offer you a better deal, which typically includes a lower minimum down payment and easier credit qualifying. Recent changes to the way lenders must calculate monthly student loan payments can make the FHA loan a more attractive option for those with student loan debt, particularly first-time homebuyers.

Your student loan debt affects whether you can buy a house, in both direct and indirect ways. Here’s how:

  • Student loan payments make saving for a down payment more difficult and mortgage payments harder to handle once you’re a homeowner.
  • Student loan debt may increase your debt-to-income ratio, affecting your ability to qualify for a mortgage or the rate you are able to get.
  • Missing a student loan payment can lower your credit score, but consistently paying on time can bolster it.

Having student loans, though, doesn’t mean you’ll never be able to get a mortgage. Here’s what you should know as you explore your options.

Student loan payments hinder savings

Sending hundreds of dollars a month to your lender or servicer may feel like the most immediate, and most frustrating, way student loans affect your ability to buy a house.

But saving up 20% of the home’s value for a down payment, traditionally the ideal amount, isn’t always necessary. Look into first-time home buyer programs in your state, which can provide money for the down payment, or low-down-payment mortgage options.

Federal agencies like the Federal Housing Administration and the U.S. Department of Veterans Affairs also offer mortgages that require smaller down payments — or none at all, in the case of VA loans.

Student loans add to your debt-to-income ratio

When deciding whether to approve you for a mortgage, lenders look at how much debt you already have compared with your pretax income. That’s called your debt-to-income ratio, known as DTI, and it’s calculated based on monthly debt payments.

There are different types of debt-to-income ratios, and not all mortgage lenders calculate them the same way. But in general, car loans, student loans, minimum credit card payments and child support all factor in. The more debt you have — or the lower your income — the higher your DTI will be.

A DTI of 36% or less is ideal, but government-backed mortgages, like FHA loans, may approve you with a DTI of up to 50%.

Consider focusing on paying off student loans, or credit cards if they have higher interest rates, and don’t add to your debt before buying a home. You could aim to get rid of one student loan payment before you apply for a mortgage; paying off the loan with the highest interest rate will save you the most money over time.

Refinancing student loans to a lower monthly payment may also reduce your debt-to-income ratio. But it adds a line of credit to your credit report and may extend your repayment timeline. Make sure you refinance six months to a year before you apply for a mortgage. That lets positive payment history offset the credit score dip that may occur from shopping for a refinance loan.

Student loan payments affect your credit score

A higher credit score means a better chance of getting approved for a mortgage and receiving a favorable interest rate. Payment history makes up 35% of your FICO score, one of the two main credit scoring models, and mortgage lenders want to see a history of on-time debt payments.

Consistently paying student loans on time will strengthen your score. On the flip side, a missed payment or letting your loans default will hurt it.

Credit mix is a smaller component of your score. But using a variety of credit types — such as student loans, car loans and credit cards — can help your score as long as you’re making payments on time.

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