But just because you’re not making payments now doesn’t mean your student loans don’t matter. Your student loans can have a major impact on your credit score and financial life. Whether that impact is positive or negative will depend on what you do once payments resume.
Though student loans are commonly considered good debt – debt that can potentially enhance your life in meaningful and long-term ways – they still are debt and can affect your financial future.
Student loans can help or hurt your credit score, just like any other type of credit obligation that shows up on your credit report, says Michelle Lambright Black, a credit expert and founder of CreditWriter. For example, on-time payments on student loans could strengthen your credit score over time. Late payments, meanwhile, could trigger a credit score drop, she adds.
As long as you make payments on time, though, student loans are more likely to help your credit score than hurt it. Here’s what to know about how student loans affect your credit score – and how you can leverage them to your advantage.
How Do Student Loans Affect Your Credit Score?
Your credit score is generally calculated using five main factors: payment history, credit utilization (balances owed divided by total available credit), the age of your credit history, your credit check that mix, and recent hard credit inquiries.
Your student loans impact your credit score mainly through your payment history, according to Mark Kantrowitz, a higher education expert and author of How to Appeal for More College Financial Aid. Payment history accounts for the largest part of your credit score, so late or missing student loan payments can have a fairly big impact on your credit score.
Late payments can cause your credit score to drop by 50 to 100 points, says Kantrowitz. Defaulting on your student loans, which occurs after a 120-day delinquency on private student loans and 270 to 360 days for federal student loans, can have a bigger impact on your credit score.
Because student loans are considered installment loans, credit utilization does not matter as much as it does with revolving accounts like credit cards, Kantrowitz explains. However, having an installment loan in your credit mix, especially one that helps establish a longer credit history, could be helpful to your overall credit score.
Both Black and Kantrowitz say that private and federal loans affect your credit in similar ways. From a credit scoring perspective, there’s no difference between a federal and a private student loan, says Black.
Student Loans Can Help Your Credit Score – As Long as You Pay on Time
It’s important to note that your credit score isn’t the only part of your financial profile that student loans affect, says Kantrowitz. They can also impact your debt-to-income ratio, making it harder to qualify for a mortgage. However, recent changes to mortgage underwriting rules for certain government-backed loans mean that borrowers on an income-driven repayment plan may have an easier time qualifying for a mortgage compared to before, Kantrowitz says.
Because of the importance of payment history, each missed student loan payment – private or federal – can have a significant negative impact on your credit score.
However, Black points out, your private lender or your federal servicer has to report you as late before the action affects your credit. With private lenders, that could happen when you reach the 30-day past due mark, Black explains. Federal student loan servicers, by comparison, typically don’t report you as late to the credit bureaus until you’re 90 days past the due date.