Do student loans show on credit reports and affect credit scores? Yes of course they do.
However, you feel the impact differently based on the stage you are at, the type of debt, and payment status. The choices families make to finance a college education can have consequences that last for decades.
Student loans are often one’s first encounter with financing. Follow this three-part outline to find the answers pertaining to you.
- Impacts on reports and scores while still in school
- Factors counting for and against ratings after graduation
- How long before the information falls off your report
Student Loans While Still in School
The first common question to address is whether student loans will show up on credit reports and affect credit scores while still in school. You do not need to make payments until six months after you graduate, but you can if you want.
Your choice of whether to make payments right away or wait until after graduation makes a big difference in the answer to this question.
Show Up on Report
Student loans will show up on your credit report while you are still in school. Each semester that you take out a new loan translates into another new account that the lender or processor could report to each of the three consumer reporting agencies.
The original principal amount will appear on your consumer file shortly after the money disburses. Each account will also display a unique open date, which corresponds to the semester that you borrowed the money.
- Loans you are delaying repayment will display a deferment status
- Loans you are repaying now will display whether you are on time or late
Expect your student loans to appear on your credit report multiple times. A person tapping into both federal and private funding in a single semester, or one type over more than one semester would see them appear at least twice – possibly much more. If the servicer sells your account it may appear multiple times – once with a zero balance, and a second time with the actual amount owed.
Effect on Credit Score
Student loans can affect your credit score while you are still in school. The degree of impact depends on whether you are repaying the obligation now, or waiting until after you graduate.
Wait Until Graduation
People will find that student loans do not affect their FICO credit score while still in school when they wait until after graduation to begin repayment. They fail the minimum requirements standard published by FICO.
- At least one account opened for six months or more
- At least one account that updated within the past six months
They will pass the first criteria after six months, and the immediately fail the second. The servicer does not need to update information on a loan that has yet to reach the repayment phase. There has been no activity to report.
Repaying in School
Repaying student loans on time while in school builds your credit score. The servicer will update your file each time that you make a monthly payment. These regular monthly updates keep you in compliance with the FICO minimum requirements standard. This means you will actually have a valid rating.
Repaying while in school helps your credit score in three important ways.
- Create a record of on-time payment. Payment history is the number one factor.
- Lower the principal balance. The amount owed is the number two factor.
- Establish an earlier starting point. The length of history is the number three factor.
How Student Loans Affect Credit Scores after Graduation
The second common question to address is how student loans affect credit scores after you graduate and you begin making payments. In general, on-time payments build them up, while late payments bring them down. You will also find important distinctions between federal and private loans during this phase.
Build Credit Scores
Student loans help build credit scores when you make on-time payments over time, and gradually reduce the balances owed. Payment history makes up 35% and amount owed makes up 30% of the equation.
- By making your payments on time, you establish a positive record on the most important metric counting towards your rating.
- Your utilization ratio improves as the balance owed declines relative to the original principal amount, which increases your rating.
- Paying your obligations off early accelerates the decline in your utilization ratio, which then improves your rating.
- Consolidating loans into one payment can lower monthly payments, which help you to stay current on the obligation and avoid problems.
Bring Down Credit Scores
Student loans bring down your credit scores when you are late on payments. Servicers will report an adverse history of at least 90 days or later. The degree to which you are delinquent and the steps that were taken by the processor to collect the money owed determine how much you will lower your rating.
- Active collection accounts hurt more as it suggests you are struggling right now.
- Historical delinquencies hurt less as it suggests you are back on your feet.
- Defaults occur after you are 9 months late and count against ratings further.
- Wage garnishment damages ratings the most as you add a public record judgment.
Federal Student Loans
Federal student loans affect credit scores after you graduate in many different ways. The federal government offers a number of special programs, many of which provide flexibility during the repayment phase.
Subsidized federal student loans do not factor into credit scores in any special way. The government pays a portion of the interest on your behalf. You must make payments on time as with any other obligation.
Discharge, Cancellation, Forgiveness
Discharged, canceled, or forgiven federal student loans tend to help credit scores quite a bit. If the government approves your application, the bureaus must delete any negative history from your consumer report – including defaults. They will also stop any pending litigation to garnish wages.
- Cancellation of federal Perkins loans applies to individuals who perform certain types of public service or are employed in certain occupations.
- Forgiveness of federal loans applies to teachers in low-income schools and public service employees who have made 120 or more payments.
- Discharges of federal loans are available to students of closed schools, those with total disabilities, or when the borrower dies, or when the school improperly certifies eligibility, or if the school does not pay an owed refund.
Deferment & Forbearance
Federal student loans in deferment or forbearance can have a varying level of impact on your credit score. Both options allow you to stop making payments temporarily. You must apply and present your case. The servicer must agree, and allow you to suspend payments.
Your consumer report will then show a deferred payment status. This could improve your ratings if you were experiencing financial hardship and fell behind on payments. Nothing significant will change if you were paying on time.
Interest may continue to accumulate, which causes the balance to grow. This could hurt your ratings slightly as your utilization ratio will degrade over time.
- Subsidized loans do not accumulate interest during deferment.
- All loan types accumulate interest during forbearance.
Private Student Loans
Private student loans do not affect credit scores for the primary borrower in any unusual ways. There is nothing special or unique to report on this topic that we have not already covered. However, they do have special significance to parents who co-sign the note, during the application process, and during the repayment phase.
Parents When Applying
Private student loans tend to lower credit scores for parents when they co-sign for their children attending college. As part of the application process, the private lender will pull a consumer report on one or both parents. This step logs a hard inquiry. Hard inquiries lower ratings temporarily.
As described in the first section, the private lender will report the new account, which will also appear on the parents’ consumer report shortly after they approve the application. Since parents probably already have an established file with other accounts, this new information affects them differently. The new balance increases the amount owed and lowers their ratings until you pay them off – often a decade later or more.
Cosigner during Repayment
Private student loans will either help or hurt the credit score of the co-signer during the repayment phase. The lender will report the payment status for both the graduate and the cosigner.
- On-time payments help the co-signer
- Late payments hurt the co-signer
When Student Loans Come Off Credit Reports
The third common question to address is, how long before student loans come off your credit report. The answer depends on at least three factors: the amount of time it takes to pay the balance in full, the payment history, and any legal entanglements.
To illustrate how this works, we provide you with examples of information that could erase after 7 years, 20 years, or 25 years.
Disappear after 7 Years
Student loans with a history of late payments will disappear from your credit report after 7 years. Any negative payment status (delinquency or default) automatically delete from your file 7 years after the original delinquency date. The original delinquency date is when the account first became late and was never current again.
Drop Off after 20 + Years
Student loans could drop off your credit report after 20 years or more. Many graduates fall into this category. You simply add 10 and 10 together to reach the 20-year expiration date.
- You take 10 years to pay down the balance and close the account
- Accounts drop off your file 10 years after the date that it closes
Student loans could expire from credit reports after 25 years under a number of different scenarios.
- Falling behind on payments 18 years after graduation is one example (18 + 7 = 25).
- A collection agency files suit and wins a judgment to garnish wages in the 18th The public record goes away 7 years later.
- Paying down the balance and closing the account after 15 is another example (15 + 10 = 25).