Student Loans And Your Credit Score: Qualifications And Impact (2024)

Student loan debt is everywhere. Just over 14% of all consumers had student loans in 2019, and the average balance was around $35,000, according to an Experian study. While even some Americans in their 60s and 70s still carry student loan debt, you’re more likely to have a balance coming out of college—at the same time you might be trying to build your credit for the first time.

To make the most of your existing credit, it’s important to understand how your student loans and credit score will interact. If you play your cards right, student loan debt can actually give you a boost forward. But if you mismanage your hand, it could end up hurting you. No one wants to take out student loans—but if you have to, knowing how credit scores and student loanswork together can allow you to make the best of the situation.

What Credit Score Do You Need for a Federal Student Loan?

In addition to helping build credit, federal student loanshave several significant advantages over other borrowing options. One of the most unique characteristics of federal student loans is that you don’t need a credit history to qualify. This stands in stark contrast to other loan types that require a co-signer for applicants with bad—or nonexistent—credit. With federal student loans, you can start building credit right away, all on your own.

The only exception is with Grad PLUS loans or Parent PLUS loans, which may take your credit history into account. If your credit history is bad, you may need a co-signer (called an endorser in this case), or you can appeal the decisionif you’re denied a loan.

Federal student loans also carry lower interest rates than many other credit building tools, like credit cards and personal loans. They also come with more protections in case you run into trouble making your payments, and they can even be completely forgiven in some cases. This combination of features makes student loans an excellent way for responsible borrowers to build their credit.

What Credit Score Do You Need for a Private Student Loan?

Unlike federal student loans, where the Department of Education is your lender, the private student loan marketis a bit more of the Wild West. Anyone can lend you money for college under the guise of a “private student loan,” and, as such, lenders vary widely.

Each private lender sets their own credit score requirements. However, as with all loans, your chances of getting a loan at a favorable interest rate are higher if you have good credit (670 or above, according to FICO). Because most students don’t have any credit, borrowers typically need a co-signer to get private student loans. The primary exception to this is borrowers who are going back to school as adults and have well-established credit.

According to one 2017 to 2018 surveyfrom the Iowa Office of the Attorney General, just about all applicants except those with the worst credit (549 or lower) were able to get private student loans. However, loan costs varied widely, and even those with the best credit scores could expect to pay an interest rate from 3% to 12.875%.

That’s why it pays to shop around. Each time a lender runs a hard credit check it can temporarily damage your score. But if you do all of your rate shopping within a 30-day period, it’ll be treated as a single credit pull, thereby limiting the damage to your score.

What Credit Score Do You Need to Refinance a Student Loan?

When you refinance a student loan, you’re essentially replacing your current student loan (whether federal or private) with a private student loan. That’s because you can’t refinance federal student loans; you can only consolidate them into a single loan.

Because refinancing your loan means taking out a new private student loan, the rules about credit are generally the same. The higher your credit score, the better your odds of being approved for a good rate. Every lender is different so there’s no one credit score you need to refinance your loans. But again, if your credit isn’t good, you may need a co-signer to help you qualify.

How Student Loans Affect Your Credit Score

Once you have student loans in your name, they can impact your finances in a few different ways. Here are the most common ways in which student loans affect your credit score.

Payment History

The largest factor in determining your credit score is your payment history—i.e., how consistently you make on-time payments. This factor alone makes up about 35% of your credit score.

Once you start making payments on your student loans, each payment (or lack of payment) will be recorded on your credit report. If you always pay on time (hint: sign up for autopay), this may help boost your score over time.

But if you pay late—or default—it can harm your credit score. Paying a few days or even weeks late may not ding your credit score, although you probably will be charged a late fee. Generally, lenders will report your late payment to the credit bureau once it’s 30 days past due—and each month thereafter until it’s paid. Each additional late payment on your credit report drops your score even further and stays on your credit report for seven years before falling off.

Amount Owed

The amount of money you owe on your debt generally has the second-largest impact on credit, making up about 30% of your score. However, your revolving debt from things like credit cards generally impact your credit utilization the most because FICO’s algorithm generally rates these types of debt as more important.

It’s possible that the same balance on a credit card would hurt your score more than the same amount in student loans, although it depends on other factors such as your payment history and how high your balances are. For example, if you have $35,000 in student loans, the debt likely won’t be as impactful as if you max out $35,000 in credit card limits.

One thing your student loan balance doesaffect is your debt-to-income ratio. This doesn’t really factor into your credit score, but it does impact whether lenders are likely to approve you for future loans like credit cards and mortgages. If your student loan payments take out a big chunk of your income, it might be harder to access other types of loans in the future.

Length of Credit History

Lenders like to see that you can manage your debt over a long period of time, not just as a short term IOU. To account for this, the length of your credit history makes up about 15% of your credit score.

Most people take 10 years or more to pay off their student loans if they only make the minimum payments.No one wantsto be in debt that long,but you can at least use the time to build up a long credit history.

Credit Mix

Similarly, lenders like to see that you can manage the different types of debt available to you, including both installment loans and revolving credit. Credit mix makes up about 10% of your credit score.

By having student loans, you’re showing potential lenders that you can manage and repay installment loans. Similarly, applying for and paying down a credit card can boost your score by demonstrating your experience with revolving credit.

Ways Student Loans Can Hurt Your Credit

Here are the things to watch out for if you have student loans:

• Late payments.Making a payment late or defaulting on the loan is the biggest way student loans can harm your score.
• Applying for a private student loan.Lenders do a hard credit check when you apply for a loan,which can have a small negative effect on your score for a few months.
• Carrying a large student loan balance.Borrowing a lot of money can have a negative impact on your score. It can also negatively affect your debt-to-income ratio by increasing your outstanding debt.
• Paying off your loan. Paradoxically, paying off your student loan can sometimes drop your credit score,but this effect is usually temporary. This might be more likely to happen if your student loan is the only installment loan you have, for example.

Ways Student Loans Can Help Your Credit

It’s always better to notowe any debt, but if you need student loans to get through school (and many of us do), they can at least help you build your credit. Follow these tips to boost your credit using student loans:

• Establish a good payment history.Make all of your payments on time, and you could be rewarded with a better credit score. Signing up for autopay makes this easier so you don’t have to consciously think about payments.
• Builda good credit mix.Installment loans—along with revolving credit like a credit card—can help show creditors you’re good at handling both types of debt and may ultimately increase your score.
• Lengthen your credit history.Lenders also consider how long you’ve been managing debt. For this reason, paying off your debt responsibly for many years can help raise your score.
• Skip the co-signer.This one won’t really affect yourcredit score. But if you take out a federal student loan without a co-signer, you won’t risk messing up a friend or family member’s credit if you miss a payment or default.