In this week’s ionGuest column, credit expert John Ulzheimer explains finance fundamentals, and shows how your student loans can affect your credit score.
How Do Student Loans Affect Your Credit Score?
I often get questions from young college graduates asking about the impact of their student loans on their credit reports and credit scores. Most of them didn’t even consider their credit scores when they agreed to take out the loans. However, given that their credit scores are now going to play an important and influential role in many of their upcoming life events, the interest level has certainly risen.
A student loan is what’s formally referred to as an installment loan. An installment loan has a fixed payment for a fixed number of months. Think about how a mortgage or an auto loan works and it’s the same thing. You may have a student loan payment of $175 for the next 120 months, or installments.
How Student Loans are Reported
Where student loans differ from other installment loans is how they’re reported to the credit reporting agencies. Normally if you have an auto loan or some other installment loan they show up one time on each of your credit reports, because you have only one loan. Student loans are reported to the credit bureaus on a disbursement-by-disbursement basis. That means if you took six disbursements to fund your education, you’ll likely end up with six loans showing up on your credit reports.
This is really the only way a student loan would have a negative impact on your scores, unless of course you skip your payments and eventually go into default. The fact that you’ve got multiple accounts with balances can have a negative impact on your scores, albeit fairly minor. This can normally be rectified by paying off accounts with balances, like credit cards, but that’s easier said than done with it comes to student loans with fairly large balances.
How Student Loan Payments Impact Credit Scores
If, of course, you missed your loan payments then all bets are off. A late payment on a student loan is no different than a late payment on any other account. According to Jeff Richardson, Vice President of Communications and Public Relations at VantageScore Solutions, “Student loans are treated by the VantageScore model much like other types of installment loans. Positive payments can help a consumer’s credit score and missing payments can have a negative impact. When the student loan is in deferred status, the exposure of failure to repay is lower given there is no current obligation to make a monthly payment. When the loan is active – there is an expectation of monthly repayment.”
In the grand scheme of things installment loans, student loans included, have a marginal (minor) impact on credit scores assuming they’re being paid on time. That’s because installment debt is a much more secure type of debt than credit card debt. While the lender or servicer cannot come repossess your education, it’s next to impossible to get out of student loan debt other than paying it.
You cannot discharge student debt in a bankruptcy except under the most extreme circumstances. And no, your circumstance isn’t extreme simply because you lost your job or your work hours were cut. And to add insult to injury, the federal statute that defines how long negative information can remain on your credit reports (the Fair Credit Reporting Act) is silent on how long the credit bureaus can maintain defaulted government backed student loans. “Silent” means they don’t ever have to remove them per that statute. The Higher Education Act does require that they be removed from your credit reports seven years after you’ve paid them.
John Ulzheimer, credit expert for Credit Sesame, is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is twice FCRA certified by the credit industry’s trade association and has been an expert witness in over 170 credit related cases to date. Since 2004 John has been interviewed and published over 3,000 times on the topics of personal finance and consumer credit.
This article first appeared on Credit Sesame Daily. Credit Sesame provides free credit scores, credit monitoring, credit education and complete credit analysis.