Asking the question “How will my student loans impact my credit?” is like asking “What will this brownie do to my waistline?” The answer to either question is going to depend on a host of other factors. A well-managed student loan has the ability to add another positive, credit-building account to your credit reports. However, a student loan that is consistently paid late or has fallen into default can mean serious trouble. As with any other type of credit account, the impact your student loans will have on your credit reports and scores all comes down to the following – how you manage them.
Student loans are often viewed as “good debt.” One of the reasons that student loans are generally viewed as good debt, at least from a credit score perspective, is because the debt itself is likely going to have little to no negative impact upon your credit scores.
Credit scoring models such as FICO or VantageScore do pay attention to the amount of debt you owe. However, installment debt, such as student loans and auto loans, is not viewed or weighed in the same manner as credit card debt. In other words, while a $500 credit card balance might have a measureable negative impact on your credit scores a $50,000 student loan is likely to be benign as long as it’s being paid on time.
Keep in mind that every disbursement you took out during college will likely appear as a separate loan on your credit reports. Therefore, if you took out a loan every semester for 4 years of undergraduate study then you would have 8 different loans on your credit reports.
The existence of multiple accounts with balances on your credit reports, even if they are always paid on time, can have a negative impact on your credit scores. For this reason, it might be worth looking into consolidating your loans down into one, single account in order to reduce the number of accounts with balances appearing on your credit. Plus, consolidating your student loans can help you to play defense with your credit as well. Think of it this way: if a catastrophe happened and you were ever unable to pay your bills as scheduled it would be preferable to have a single late payment on a single student loan account than to have 8 late payments appear in a single month. One late payment could still be bad, but 8 late payments could be devastating.
Student Loans with Late Payments
Late payments on any credit obligation, whether it’s a mortgage or a student loan, could have a negative impact on your credit scores. As mentioned above, student loan lates can be especially problematic because, although you may send in only one check to your student loan issuer each month, you likely have more than one account showing up on your credit reports unless you have already consolidated your debt. Multiple student loan lates on multiple accounts can unfortunately cause severe damage to your credit scores practically overnight. Student loan late payments are treated no differently by credit scoring models than late payments on any other type of account. Late payments are late payments.
Student loans that have gone into default and have gone into collections are the most problematic of all from a credit score perspective. Not only can defaulted student loans send your credit scores spiraling downward, they have the ability to continue to do so forever.
Most other types of negative debt have an expiration date when it comes to credit reporting thanks to the Fair Credit Reporting Act (FCRA). In general, negative accounts have to be removed from your credit reports after a period of around 7 years (with a few exceptions). However, the FCRA is completely silent on the subject of student loans. Unpaid and defaulted federal student loans are allowed to remain on your credit reports indefinitely and, as a result, can quite literally continue to negatively impact your credit scores for as long as you live.
The credit bureaus can certainly choose to remove them at any time but they are not required to by the FCRA. And, if you’re looking for them to do you a favor and remove it, you may be disappointed.