After you graduate from college, repaying your student loans is a great way to build and maintain a good credit score. Also, by repaying your student loans responsibly and regularly, you’re more likely to be able to qualify for an apartment, a car loan, or a mortgage in the future. In other words, student debt does have an upside. But if you fall behind in payments or default, your credit score will take a big hit and you might face other consequences, like a wage garnishment, too.
What is a Credit Score? A Number That Indicates Your Creditworthiness
When you apply for a loan, like a mortgage or a car loan, the lender will pull your credit score to assess your creditworthiness—that is, whether you’re likely to repay the debt. Statistically, the higher the score, the more likely the borrower is to pay back the money borrowed. Borrowers with low credit scores are more likely to default.
Credit scoring companies use “models” that analyze data about consumers to generate credit scores. Many different scoring models exist, which means your score can vary by a few or many points depending on which model produces the score and what type of company (like a car dealership, department store, or mortgage lender) asks for the score.
FICO scores—the largest and most widely-used scores—usually have a range of 300 to 850. The score is based on your past credit information, including:
- your payment history
- amounts owed
- the length of your credit history
- new credit (whether you’ve opened several accounts in a short period), and
- what different types of credit accounts you have.
How Student Loans Affect Your Credit Score If You’re Current on Payments
If you pay your student loan bills each month, you’ll see a steady increase in your credit score. Here’s why. According to FICO, your payment history makes up 35% of your score. So, having a record of consistent, timely student loan payments will boost your score. Also, because FICO likes to see a mix of credit types, which makes up 10% of your score, having student loans along with other debts—such as a car loan and credit cards—is generally good for your score. Furthermore, the length of your credit history accounts for 15% of your score; if you make payments for a number of years, that will help your score. (Learn more about how FICO scores are calculated in Nolo’s article Your Credit Score: What It Is and Why It Matters.)
Student Loan Deferments and Forbearances
With a student loan deferment, you don’t have to make payments for a while because of a specific condition in your life—like returning to school, economic hardship, or unemployment. If you don't qualify for a deferment, you might be able to get a forbearance. With a forbearance, your loan holder permits you to stop making payments for a while or reduces your payments temporarily. (The main difference between a deferment and a forbearance is that with a forbearance, you’re responsible for paying the interest that accrues.)
Getting a deferment or forbearance on your loan won’t ding your credit score because the loans are treated as being “paid as agreed” for scoring purposes. If you go into default on your student loans, though, that’s another story.
How Defaulting on a Student Loan Affects Your Credit Score
If you’re a little late paying your federal student loans, your score probably won’t drop, although you will get stuck with late fees and you could possibly jeopardize your loan forgiveness options. For federal student loans, the servicer usually won’t report your loan as late to the credit reporting agencies until the payment is more than 90 days late. If you have private student loans, the servicer will probably report it as late after 30 days. This reporting will lower your credit score.
If you don’t make a payment for 270 days, a federal student loan will go into default. Defaulting on your loans will have severe repercussions for your credit score—more so than a 30- or 90-day delinquency and could have other serious consequences as well. The Department of Education can accelerate the entire loan balance on a defaulted loan and sue you for the full amount, or collect the debt through one of its many special collection remedies, like:
- garnishing your wages
- taking your tax refund, or
- seizing your federal benefits, such as Social Security (although the government must let you keep a certain amount).
Getting Help
If you’re having trouble keeping up with the payments for your federal student loans, contact your loan servicer to find out about different options that might be able to help you. You could have deferment or forbearance options, you might be able to get a more affordable repayment plan, or you might be able to lower your monthly payment amount with a Direct Consolidation loan. If you’re already in default, you can get some credit reporting benefits if you rehabilitate or consolidate the defaulted federal student loan. If you have private student loans, call your lender or loan servicer to learn about different options in your situation.
If you have further questions about your options or need help dealing with your servicer, consider talking to a consumer protection attorney who specializes in student loans.
