How Do Student Loans Affect Your Credit Score

Over the long haul, a college education is still a good investment for future earnings. According to Pew Research, college-educated Millennials earn on average $17,500 more a year than their peers with only a high school education, and the unemployment rate for college graduates is just 3.8 percent versus 12.2 percent for high school graduates.

Unfortunately, many college graduates have a hard time finding a job right out of college. While the unemployment rate for college graduates over the age of 25 stands at just 3.3 percent, 8.5 percent of those 21 to 24 are unemployed. Those who can’t find a job, or can’t find one that pays enough to cover their bills, are often forced to decide if one of the bills they don’t pay is for their student loan. If you’re not paying your student loan, how is your credit score affected?

FICO determines your credit score (a number from 300 to 850) based on five principal factors, each of which affects your score differently. In general, the most important factor is your payment history, accounting for 35 percent of your score. This is followed by how much you owe (30 percent), the length of your credit history (15 percent), new credit (10 percent) and types of credit used (10 percent). Having a shorter credit history negatively impacts your credit score. If, on top of this, you don’t pay your student loans on time, your credit score could be seriously harmed.

The simple answer is that your credit score is extremely important. Banks and businesses decide whether to loan people money based on the likeliness of that money being repaid. A low credit score could mean that you won’t be able to get a credit card or a loan for a car or a home mortgage, or that the loan you do get will have a higher interest rate. This means you’ll end up shelling out more to repay the loan.

There’s a positive side to your student loans. Repaying them on time is one of the best ways to establish your credit history and increase your credit score, and that could help you obtain credit cards, get that first apartment, qualify for a mortgage or buy a car. One word of caution: repaying your student loans too quickly can actually hurt your credit score. Your best bet is to pay your loans on time.

You should avoid defaulting on your loan at all costs. Although defaulting might seem like a good idea at the time, it will wreck your credit and stay on your credit report for as many as seven years. And don’t assume that defaulting means the loan disappears. Lenders can garnish everything from disability checks to social security to recover their money.

Yes, you can defer repayment of the loan. Eventually, you’ll still have to repay, but deferring won’t hurt your credit score. In some cases, deferring repayment could actually increase the chances of qualifying for other loans, since lenders assume that, without the burden of loan repayments, you’ll have additional income to repay them.

Your student loans have the potential to hurt your credit score, but they can also be one of the best ways to build a solid credit history. Your best option is to pay off your loan every month, on time. Second best is to defer repayment until such time as you have the income to make monthly payments. The worst thing you can do is to miss payments or default on your loan. You may want to look into refinancing student loans if bringing the monthly payment down will help. Check out our top student loan refinancing companies for more info.