How do student loans affect your credit score?

After about three years of having a respite from paying student loans every month, those pesky educational loan payments will be due again starting June 30th.

Student loan interest will resume starting on September 1, 2023, and borrowers will have to restart payments in October. The U.S. Department of Education will notify borrowers before payments restart.

And as the fate of loan forgiveness is debated in the highest court in the land, even as we speak, no matter what the outcome, it’s time to refocus on student loans.

Of course, student loans need no introduction, as about 43.5 million Americans currently carry federal educational loans at any given time or about 13% of the country. That number is far higher if you add in private educational loans.

So, today, we wanted to go over one key aspect of student loans that’s often ignored in the overall conversation: how they affect credit scores.

To document the link between student loans and credit scores, it all starts with how (and when) you pay back your loans.

With student loans, you have a fixed amount of money you’re required to pay every month (pandemic pauses notwithstanding) plus interest.

Like any other debt that reports to the credit bureaus, if you default or become delinquent on your student loans, that negative item can remain on your credit report for seven years.

But it’s also important to understand that student loans are a form of installment loan – not revolving debt like your credit card.

Therefore, the presence of student loans may affect your credit score in several different forms.

When first applying for student loans, lenders will typically perform a credit check to make sure you’re a suitable candidate, reporting as a hard inquiry on your report. With most hard inquiries, your score may drop a few points temporarily when shopping around for loans.

However, two forms of student loans – Direct Subsidized Loans and Direct Unsubsidized Loans – are available for students no matter what their credit history, so neither requires a hard inquiry on your report.

But Direct PLUS Loans do require a credit check, so just be aware.

Believe it or not, when you first take out a student loan, your credit score may actually increase, thanks to the improved mix of credit – a key factor in credit scoring.

However, it’s critical you don’t take on too much debt that may drive your credit utilization ratio in the wrong direction, a major factor in credit scoring as well.

But, most of all, your credit score will be affected by your payment history. Paying your loans and debts on time every month is the greatest factor in credit scoring, so making student loan payments on-time over time will help build your credit history and improve your score.

Now, let’s get down to the bad news – what a missed payment does to your credit score.

When you fail to make a student loan payment, you do have 90 days before it’s considered delinquent. After that 90-day period, it will appear on your credit report and cause your score to drop – probably significantly.

Missing payments ongoing will continue to erode your credit score and possibly shut the door on certain debt relief options available to student loan borrowers.

And remember that with student loans, the interest on your loan will keep rolling, hefty fees will accrue, and your wages can be garnished.

As we mentioned, a default or delinquency can remain on your credit report for up to seven years. Most likely, you’ll have a hard time getting approved for new student loans during that time, thanks to a blight on your credit history.

So, before you take out a student loan – or even if you have one now and are struggling with the fact that payments are restarting, it’s important to do your research and understand your options.

Take out your loan paperwork and read through it again, understanding your terms and conditions.

There are options for repayment plans and aid available, some of which may lower your monthly payment based on an income-driven repayment plan (IDR).

BEFORE you ever miss a payment or become delinquent on your student loans, we recommend you call your loan servicer and ask about options for help. You’ll want to stay current and in good standing with your student loans, avoiding any negative reporting to your credit.

As always, if you need any help or advice with anything credit-related, Blue Water Credit is here to help.

We’re the industry leader in ethical, legal, and highly effective credit repair, so please reach out any time!