When it comes to your credit score, student loans can have an impact. Recent statistics show that approximately 43 million people have outstanding federal student loans, totaling $1.6 trillion. In addition, millions of private student loans total more than $136 billion.1 That’s a lot of money tied up in student debt. But do student loans affect credit scores enough to matter?

How do student loans affect your credit score?

A federal student loan is a loan funded by the U.S. government and is subject to congressional guidelines. These loans will have better interest rates and repayment plans than what is typically available from private loans.

A private student loan is made by a bank, credit union, or state-based organization. Loan terms and conditions are stipulated by the lender. Private lenders aren’t subject to the same mandates and caps as federal loans, so they are usually more expensive.

So, now that we have identified the different kinds of student loans, let’s break down how they may affect your credit score. There are many different kinds of credit scores, but we’ll focus on FICO®, the score most often used by the big-three credit bureaus — TransUnion, Experian and Equifax. Your FICO® credit score is based on five aspects, and we’ll explore each one and how it can relate to a student loan.

Payment history and student loans

Payment history is the biggest factor in calculating credit scores, counting for 35% of the total. Most negative occurrences stay on your record for 7 years. Some things, like bankruptcies and lawsuits, can stick around for 10 years. Make on-time payments on your student loan, other installment loans, and credit cards, and the scoring model will award you top marks and highest points.

If you’re late making payments or miss a monthly payment, your loan servicer will notify the three major credit bureaus. The FICO model will deduct points. That’s why missing payments may lower your score.

The more overdue your payment, the more the model penalizes your score. But there’s good news: If you have a late or missed payment, catching up the account will help. After you’ve kept your account current for a while, the scoring model will weigh older issues less.

With federal student loan payments, there’s generally a longer grace period related to credit bureau reporting. The federal loan servicer may wait to notify credit bureaus until your loan payment is more than 90 days late. Before that, the servicer will typically send notices and may allow payment arrangements, like an income-driven repayment plan.

In contrast, a private lender has no reporting restrictions. If you are more than 30 days late on any installment loan, they may report it and your score may be impacted.

Another caution to keep in mind is defaulting on your loan. If you are “in default,” then you haven’t made payments in a long time – that period is usually defined in your loan agreement. Private loan servicers can take immediate action to collect the debt once you are in default, and federal student loan servicers can attempt to recover your student loan debt by suing you or garnishing your wages. All of this could your credit score where it hurts.

If you are in default – or are having difficulty making your payments – it’s important that you call your lender or student loan servicer to see what kinds of payment programs are available to you.

Credit utilization and student loans

This one counts for 30% of your total FICO score. Credit utilization is just a fancy way of saying “amounts owed.” The scoring model adds up what you owe across your credit accounts and compares that with your total credit limits. For instance, a credit card issuer might grant you a card with a $10,000 limit. If you charge a $3,000 vacation on it, that will mean a 30% utilization. That rate is the maximum you want to have from a healthy credit perspective. A higher ratio starts to detract from your credit score.

Let’s say that in addition to the credit card we just mentioned, you open a new loan, like a personal loan or student loan, for $20,000. You might expect your utilization ratio to skyrocket! Fortunately, the scoring model bases your ratio only on revolving credit, like credit cards or store credit accounts. So, your student loan has no effect on this part of your score.

Something to note: Your credit utilization ratio is different from your debt-to-income ratio (DTI). Lenders use DTI to figure how much money remains in your pocket every month after you pay your bills. Need a new auto loan or credit card? The more money you have left over at the end of the month, the better your chances for approval could be.

Credit history and student loans

Your credit report contains your account history, and this part of the score reflects the overall age of your accounts and that history. The history of all your revolving credit and other loans counts toward 15% of your credit score.

Because they are long-term loans and stay on your record for quite a while, student loans could impact your score positively if you pay your monthly payment on time.

Credit mix and student loans

Credit mix counts for 10% of your score. It looks at all the types of credit you carry, like lines of credit, revolving accounts, mortgages, and other installment loans. A good credit mix can have a positive effect on your score. The downside? Once your student loan is paid off, your credit score may decrease some due to the reduction in credit mix.

New credit and student loans 

This part of the score, accounting for 10% of the total, is based on new credit that you take on. Opening multiple new accounts around the same time may knock down your score a few points. Also, a new loan reduces the credit history part of your score by reducing the average age of your credit. To maintain good credit, avoid accepting any new credit for six months to a year after starting a new loan.

Simply applying for credit could decrease your score if lenders do a hard credit check.

Why it’s important to check your credit report 

Everyone with a loan or credit account should check their credit reports regularly. You can get your free report at annualcreditreport.com. Go over it in detail and check for any inaccuracies — especially any negative information. Report errors to whichever credit reporting bureau is responsible. They are required to investigate and report their findings. Plus, they’ll send you an updated report for free. And if you find an error in one credit report, check your reports from the other two credit bureaus.

You can also see your credit score, review your report, and receive credit alerts by becoming a Best Egg Financial Health user.

The wrap-up

It’s important to keep your credit accounts current. Staying on top of your finances before anything gets out of hand is the best way to ensure a great financial future – and that includes tracking your student loans and the progress you’re making toward paying them off.