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Paying off student loans might not be the most enjoyable financial task, but there is a slight upside for borrowers: Paying your bills consistently on time can lead to a gradual improvement in your credit score. Since student loans are typically paid off over many years, your credit score benefits from both the length of your credit history and payment history. Thus, managing this debt responsibly over time can have a positive impact.
On the other hand, carrying debt can negatively affect your credit score. The impact varies depending on the situation. A slightly late payment won't drastically harm your score, though you'll face late fees, and it could influence your loan forgiveness status. Federal servicers typically don't report late payments to credit bureaus until they reach 90 days past due, so being a little behind may not be a huge issue (as long as you catch up). Private servicers, however, report after just 30 days.
If your lender does report a late payment, that mark will remain on your credit report for seven years. The more delayed your payment, the greater the negative impact, as reported by NerdWallet. “If you fail to make a payment for 270 days, your federal student loan will go into default, which will have a far more significant impact on your credit than a 30- or 90-day delinquency.” Again, payment history is a key factor in determining your credit score.
Additionally, applying for new loans or refinancing triggers a hard inquiry on your credit report, “which may slightly reduce your score,” according to Credit.com. “A new account will also appear separately from the inquiry, causing a minor, short-term dip in your credit score.”
One way student loans don’t directly affect your credit score but still impact your finances: When you apply for a mortgage or other products that involve a credit check. For instance, if you're married and looking to buy a home but have significant student loan debt, your overall debt-to-income ratio becomes crucial, explains Mike Brown, managing director of Comet, a company offering student loan refinancing guidance.
“If your debt-to-income ratio is too high, say you owe $70,000 and earn $40,000 annually, securing a mortgage becomes difficult,” he says. However, with a higher combined income with your spouse, you might still qualify.
What to Do If You Can’t Afford Your Payment
If you're struggling to make your payment, you can request a reduced monthly payment, deferment, or forbearance, which won't negatively affect your credit score. Federal loans make this process straightforward, and “if you’ve missed payments on a federal student loan, you can explore loan rehabilitation,” advises Credit.com. “This program helps borrowers restore their repayment status and remove the default from their credit report.”
For private loans, deferment and flexible payment plans depend on your lender, so be sure to reach out and inquire about available options.
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