Do student loans show on consumer reports and affect credit scores? Yes, of course, they do. However, you feel the impact differently based on your life-stage.

Most students accumulate debt while in school, which marks the birth of their first consumer report – absent any payment history.

The repayment phase begins no later than after the grace period expires (six months after graduation, leaving school, or dropping below full-time status).

Your payment behavior then determines whether you will help or hurt your ratings. Removing negative entries from your report only works when the information is inaccurate.

Student Loans While Still in School

The first issue to address is how student loans affect credit scores while still in school. The question has two parts that operate much differently.

First, attendees are often taking out new loans every semester, and each new account shows up on your consumer report shortly after disbursement.

Taking Out

Most attendees are taking out student loans while in school, and do so for up to eight semesters before graduating. The impact on your credit score during this phase differs for federal vs. private lenders.

  • The Department of Education does not pull a copy of your consumer report or log a hard inquiry on your file. Instead, they consider only the information submitted on the Free Application for Federal Student Aid (FAFSA) form.
  • Private lenders do pull a copy of your consumer report, which logs a hard inquiry to the file of the bureau providing the information. The hard inquiry drops your score (if you have one) by about five points.

Also, using the money refunded by the college can help you pay off existing debts for related educational expenses, which could give your ratings a big boost.

Showing Up

Both federal and private student loans show up on your credit report while you are in school shortly after the money disburses each semester. Most private lenders report to all three bureaus. Your file will display five critical entries for each transaction.

  1. Original principal amount
  2. Current balance (which grows as interest accrues)
  3. Open date for the account
  4. Length of the contract terms
  5. Payment status (deferred, as agreed, number of days late, etc.)

Any trades showing a deferred status do not impact your credit score. The rating equations ignore these trade lines until there are six months of payment history.

The new entries establish that you are a real person. A verified identity can help you buy health insurance or qualify for a credit card while living campus life.

How Paying Student Loans Builds Credit

Paying back your student loans on time and according to terms, builds credit scores. The rating equations begin to factor your behavior after you complete six installments, or when the account exits the grace period after six months.

Payment history makes up 35% of your rating and is the number one factor.[1] Therefore, staying current each month is critically important, since any adverse history such as a default stays on your report for seven years after the date of first delinquency.

Utilization Ratio

Paying down student loans improves your utilization ratio (percent of available credit borrowed), which is the second most important scoring factor, making up 30% of your number. A lower percentage is better for your rating, which naturally decreases over time as you make payments.

This chart depicts the standard utilization ratio progress over time for a 20-year, 6% interest rate, $5,000 principal installment obligation when someone makes the contractual payments on time every month.

Month Balance Utilization
1 $5,000 100%
60 $4,230 85%
120 $3,207 64%
180 $1,830 36%
239 $36 1%
240 $0 0%

Goes Down

Sometimes, zero-balance paid off student loans seem to result in credit scores going down. Coincidence is the prime suspect. The rating drop is probably due to something else happening in your file because the last installment barely moves the utilization ratio (see 239 versus 240 above).

One change hurts more than the other does to help. Moving your utilization ratio from 1% to 0% is not going to boost your rating very much. Whereas, a hard inquiry, new account, or delinquency that happens at the same time could do far more damage.

Debt-to-Income Ratio

Paying off student loans to a zero balance helps your Debt-To-Income (DTI) ratio. While this fraction does not affect your credit score, banks use the metric to determine the affordability of new car loans and mortgages.

DTI = monthly debt service payments/monthly income

The semester-by-semester start point for each of your loans offers an easy-to-follow game plan for improving your DTI quickly. Focus on paying off one loan to a zero balance rather than spreading your money across all contracts equally.

For example, an undergraduate student who took out federal and private loans each semester could graduate with 16 loan contracts. Paying off just one of those obligations to a zero balance lowers the monthly debt service payment by 6.25%

Consolidation

Consolidating student loans in repayment will not help your credit score very much, but it will destroy your ability to improve your DTI ratio using the strategy noted above.

  1. The hard inquiry and new tradeline will hurt your score initially, as credit-seeking activity makes up 10% of your rating.
  2. Consolidation combines all of your loans into a new contract making it impossible to focus on paying off one-at-time to boost DTI.

Refinancing

Refinancing student loans in repayment will also not increase your credit score as the hard inquiry and new tradeline both trigger the credit-seeking equation factor. However, it could help with your DTI.

People who refinance want to lower their monthly payment, which, by definition, improves the DTI ratio. Both methods of reducing periodic obligations work in your favor in this regard.

  1. Lower interest rates (rare)
  2. Extended repayment terms (frequent)

Removing Student Loans from Credit Reports

Many people ask about how to remove student loans from consumer reports when the payment history is derogatory, or when duplicate transfer entries overstate their Debt-To-Income (DTI) ratio.

In general, it makes sense to dispute errors on your consumer report that hurt your credit score and ability to borrow money from other lenders. However, waiting for the negative information to age from your file is the only alternative when the information is correct – unless you have the money to pay it off.

Closed or Defaulted

Graduates can remove old, closed, or defaulted student loans in collections from their credit report using one of two strategies that depend on whether the information is accurate or erroneous.

However, removing old accounts in good standing would be counterproductive as this information boosts ratings and displays on reports for ten years.[2]

Disputes

Filing a dispute is the best way to get a closed student loan with an adverse history off of your credit report when the entry is wrong. Mistakes can happen at the servicer or the bureaus.

The secret to winning a dispute is to begin at the source of the error.

  • Begin with the servicing company if they are reporting a closed account that belongs to you in error. Provide documentation so they correct the mistake and communicate the correct information to all three bureaus in the future.
  • Start at the bureau if one of the reporting agencies is showing a closed account that does not belong to you. Mismatched identity is a common problem best corrected by contacting the party responsible for the logic error.

Paying

Paying off closed accounts is the only way to get the derogatory history off credit reports early when the information is correct – if you have the income.

However, this strategy is not ideal for everyone, because defaulted student loans stay on credit reports for seven years, counting from the date of first delinquency. In other words, the black mark will disappear on its own – at some future point.

When you pay off a defaulted account, the status changes to “paid was delinquent,” which is better for your score. However, the length of time this benefits ratings varies for each person depending on when the obligation first became delinquent.

Age of 1st Delinquency (Years) Time Remaining on Report (Years)
1 6
2 5
3 4
4 3
5 2
6 1
7 0

Transferred

Removing transferred student loans from credit reports typically does not help your score because the equations ignore these entries when executed correctly.[3] However, errors can happen in the two most common transfer scenarios, which can impact your rating and DTI.

  • Consolidation programs move the balance from lender A to B
  • Servicer A sells the rights to collect payment to servicer B

Transfer errors can cause a temporary double counting of any adverse payment history (score) and monthly payment amounts (DTI). Usually, the problems exist with the original lender or servicer – so begin your dispute there.

[1] FICO Score Factors

[2] Experian Old Accounts

[3] Experian Transfers