I won’t pretend paying off student loans is a positive financial experience, but there is a tiny bit of good news for borrowers: If you pay your bill on time every month, you’ll see a steady increase in your credit score. As you’re well aware, you’ll be paying your student loans for a long time, and an important part of your score is length of credit history, as is payment history. So chipping away at this debt on time over the years can give you a boost.
On the flip side, your debt can also, obviously, cause your score to sink. The degree to which it’s affected varies. A semi-late payment here or there won’t drop your score, though you will be on the hook for late fees, and it could potentially affect the status of your loan forgiveness. Federal servicers won’t report your late loan to the credit bureaus until it’s 90 days late, so if you’re a bit behind you should be okay (as long as you do pay it, of course). Private servicers are quicker to report, at 30 days.
If your lender does report your late payment, that mark will stay on your report for seven years. The later you’re making your payment, the more pronounced of an effect it will have on your report, according to NerdWallet. “Your federal student loan will go into default if you don’t make a payment for 270 days. That will affect your credit more severely than a 30- or 90-day delinquency.” Again, payment history is the most important part of your credit score.
And applying for loans (as well as refinancing) will result in a hard inquiry on your report, “which can shave a few points off credit scores,” says Credit.com. “A new account appears separately from the inquiry on a credit report, also resulting in a slightly negative, short-term impact on credit scores.”
One way it doesn’t influence the score but does have an impact on your financial life: If you’re trying to apply for a mortgage or some other product that requires a credit pull. For example, if you’re married and want to buy a house, but you have a ton of student loan debt, you need to take your entire debt-to-income ratio into account, says Mike Brown, managing director of Comet, a company that offers student loan refinancing advice.
“If your debt to income rate is too high, for example, $70,000 of debt and you make $40,000 per year, it’s going to be challenging to get a mortgage,” he says. But if you have a higher combined income with your spouse, you could be ok.
What to Do If You Can’t Afford Your Payment
If you can’t make your payment, you can ask your servicer for a lower monthly payment, or a deferment or forbearance, which won’t cause your score to drop. This is easily done with federal loans, and “if you’ve already missed payments on a federal student loan, you can look into loan rehabilitation,” says Credit.com. “That program helps borrowers return to current repayment status and have the default axed from their credit report.”
For private loans, deferment and payment plan flexibility will depend on your provider, so call and ask if the options are available.