If you pay according to the terms, student loans help your credit score. But missing payments can hurt it.
Student loans affect your credit in the same way as other loans — pay as you’re supposed to, and it’s good for your credit; pay late, and it can be problematic. Student loan creditors may give you extra time to pay before they report that you’re late.
Student loans are installment loans — you pay a predetermined amount for a specific time period. The lender reports this to credit bureaus, and you establish a track record.
You are entitled to see the information on the credit bureaus record. You can check all three credit bureaus’ reports annually for free, and you can get a free credit report from TransUnion by way of NerdWallet whenever you’d like.
If you pay promptly, every time, you’ll establish a record of responsibly managing credit.
You need to know the following things about how student loans can impact your credit score.
If You Skip a Payment or Pay Late
Everyone is human and forgets from time to time, and a one-time incident won’t impact your credit. Your score will start to decline when your lender reports your late payment to one or all three major credit bureaus.
How long before it’s reported is dependent on the kind of loan you have:
- Federal student loans: Servicers wait 90+ days to report late payments.
- Private student loans: Lenders report after 30 days.
However, lenders can impose a late charge as soon as a payment is missed.
If your lender reports your late payment, known as delinquency, it will be on your credit report for seven years.
The longer your payment is overdue, the worse it is to your credit. For instance, your federal student loan will default if you don’t pay for 270 days. That will adversely affect your credit much more than a 30- or 90-day delinquency.
If You Can’t Pay Your Student Loan
Sometimes we go through a rough time. In those cases, ask your lender about reducing or pausing your student loan payments. You might:
- Take advantage of an income-driven repayment plan for federal loans.
- Apply for a modified payment plan for private loans (and your lender offers this option).
- Enroll in deferment or forbearance to temporarily pause your payments.
Altering the terms of your loan doesn’t hurt your credit. As long as you handle payments as agreed, your credit score shouldn’t be affected, even if that means $0 per month.
Do Student Loan Payments Build Credit?
Paying promptly is the most important thing affecting your credit score. Making prompt regular payments on student loans will build credit.
If you’ve used only one sort of credit before, such as a credit card, having a student loan is great for your score as it helps your credit mix. But that’s a smaller element of your score, so it’s not wise to take out a loan you can’t afford, only to have a mix of credit sorts.
If taken out by parents, student loans affect only the credit of the person who took them out. So if a parent takes out a loan to help you pay for school, it affects their credit but not yours. If you took out a student loan and your parent co-signed, on the other hand, then both of your credit scores will be affected.
Does Refinancing Student Loans Impact My Credit?
It’s wise to search for the lowest rate before refinancing student loans, especially if you can do it without damaging your credit. The following options will prevent you from incurring multiple hard inquiries on your credit report.
- Within a 14-day period, apply for all the loans you compare. Under the FICO credit scoring model, many hard inquiries of the same kind, such as student loans, count as a single inquiry if they happen in a short time period. Different versions of the credit scoring model use different time frames, including 14, 30, and 45 days, but all of the scoring models will cover you if you submit all your applications within 14 days.
- Get rate estimates through lenders’ pre-qualification processes. A few of the lenders will let you get a rate estimate that won’t affect your credit score.
How Credit Scores Affect New Student Loans
All of your student loans affect your credit. But you needn’t have good credit to take out a student loan.
- For federal loans: Some kinds of federal student loans, including federal loans for undergraduates, don’t require a credit check. Federal Direct PLUS loans, available to graduate students and parents, require one. However, your credit score won’t affect your rate; all PLUS loans doled out in the same year have the same rate.
- For private loans: Private loans require a good credit record from at least one borrower. The Creditor will perform a check to determine whether you qualify for the loan. The better your credit score, the smaller the interest rate you’ll probably receive. Usually, undergraduate students need a co-signer to qualify for private student loans.
5 Alternative Ways to Pay for College
While the person with student loans has somewhere in the vicinity of $30,000 in debt, statistics from the Association of Public & Land-Grant Universities show that more than33%+ of graduates from four-year colleges leave school entirely debt-free.
Some of these students avoid loans and debt because their parents pay for school or have a well-to-do aunt or uncle willing to pay the bill. A large percentage of college graduates can leave school without any debt and a lot of outside help.
‘An ounce of prevention is worth a pound of cure’ regarding student loan debt. You’re a lot better off coming up with a plan to avoid student loans from the beginning.
But, how do you avoid loans when you have no rich family members? Here are some ways to consider:
Apply for Scholarships and Grants
While it sometimes seems futile to apply for college scholarships that require hours of preparation with only a small chance of getting in the, going after free money for college can certainly help you avoid loans and debt.
This advice is from Jocelyn Paonita Pearson. She founded The Scholarship System after winning over $126,000 in scholarships to pay for her own education. Since scholarships seem to be plentiful these days, it helps to have a good plan before you start.
According to Pearson, the best way to discover private scholarships and cash awards is “looking local.”
“These are the lowest hanging fruit because they naturally have less competition, are from legitimate local sources, and are occasionally renewable for future school years,” she says.
To find local scholarships you may not have a lot of competition for, look for local community foundations, credit unions, doctor offices, law offices, Elks Clubs, Rotary Clubs, and any other local sources that may offer to help.
Choose a Career in Public Service
Choosing a public service career can help pay for college; you will probably have to take out student loans and make payments under an income-driven plan for ten years to get the remaining balances of your student loans forgiven. Check into the Public Service Loan Forgiveness (PSLF), which lets people qualify for public service careers to have their debt wiped away after they work in eligible public service for 120 months in a row.
Look Into Work-Study Programs
You can also explore work-study programs that can supply you with an income while you attend. However, federal work-study programs are usually offered to students who show financial need.
To qualify for federal work-study programs, you must be planning to enroll in a postsecondary educational degree or certificate. The hourly wages you’ll earn are required to be higher than the federal minimum wage by law, and jobs that qualify for work-study can include your school itself, a federal, state, or local public agency, any private, not-for-profit organization, or a private, for-profit organization.
Like other federal programs, deciding eligibility for a federal work-study program starts with filling out a Free Application for Federal Student Aid, or FAFSA form.
Attend Community College First
According to recent statistics, one year at a public, four-year, in-state institution will cost students an average of $10,440 in tuition and fees for the 2019-2020 school year, whereas one year in a two-year community college is $3,730.
It can make a lot of sense to attend community college for a couple of years before transferring to a four-year school. With this strategy, you can finish your general course requirements at a community college where tuition is cheaper, and you could live at home and save even more.
Pursue a Trade Over a Four-Year Degree
Lastly, why do you have to attend a traditional “college” to begin with? Many jobs don’t require you to pay anything to learn a marketable skill on the job, and some will pay you wages to learn through an apprenticeship program.
The Bottom Line
The status quo requires borrowing a lot of money for college then working for ten years or longer paying it off. With some creative ideas and a willingness to create a unique new path, you could get the educational experience you want without a lifetime in debt.