Does Paying Student Loan Debt Build Credit?

The one-time payment of the loans in accordance with the terms can help strengthen and improve credit score during repayment, all other factors being equal, but outcomes may vary after student loan repayment is complete.

What is the impact of student loans on a borrower’s credit score?

The impact of student loans on a borrower’s credit score will vary depending on if the student loans are in repayment or if the student loans are paid off.

Credit score during student loan repayment

The three major credit bureaus, Equifax, Experian, and TransUnion, treat student loans like installment plans when reporting them for credit purposes. Installment plans are re-examined every 30 days, so making your payment each month will most likely give your credit score boost, all things being equal. When you pay your loan according to the terms and on time on a regular basis, you demonstrate to future lenders that you are responsible for repaying your debts on time. Also, for borrowers who don’t have a long credit history, the installment plan can add diversity to the borrower’s credit profile.

Thus, in general, borrows who are making regular on-time payments will have a stronger borrower profile, all other factors being equal.  

Credit score after student loan repayment is complete

Unfortunately, there is no one specific outcome that borrowers can expect after repayment is complete.

Borrowers without a sufficient variety of credit may see their credit scores become more volatile or go slightly down because the credit mix in their profile has changed. However, delaying repayment may not lead to better outcomes either because there it means ongoing payment of interest and a lower debt-to-income ratio, which is a different credit score factor.

Also, the credit bureaus all use different scoring models to assess a borrower’s credit score, so this may also impact how completed repayment may be assessed.

The role of credit score in getting approved for student loans

Federal student loans versus private student loans

Not all student loans require credit checks or income history. A student can receive certain types of federal student loans without a credit check, such as the Direct Stafford Loan and the Perkins Loan. Students receive federal student loans as part of their aid award package after they apply for financial aid by filing the FAFSA. For this reason and because of low-interest rates and sensitivity to student needs, students utilize federal student loans first and only when federal student loan limits are reached, do students have to explore private student loans.

When a student applies for Federal PLUS Loans or private student loans to help for school, the lender will pull the applicant’s credit score and income history to determine if they should offer a loan and if they do decide to offer the loan, this information is used to help determine loan interest rates.

More information about the differences between federal student loans and private student loans is available here.

How credit scores and credit history impact recent highs school grads

In most cases, students who recently graduated high school do not have established credit history and often do not have consistent income at the time of application, which makes it difficult to get private student loans approved at the time of application. Often, these students need to get a co-signer who does have an established credit history to share in the responsibility of loan repayment. Students who are unable to get a parent, guardian, or another individual with established credit and income to co-sign on their private student loans, do have other options.

Impact of delinquent repayment or default on credit score

After a borrower fails to make repayment after a certain amount of or stops making payments altogether for an extended amount of time (default), this information is reported to the three credit bureaus resulting in a negative impact on the borrower’s credit score. More information on the impact of student loan defaults is available here.

Options for borrowers worried about a negative impact on their credit score due to repayment

  • Contact the loan servicer ASAP – be proactive and contact your loan servicer(s) as soon as circumstances arise that may impact repayment obligations. The loan servicer can talk you through available options.
  • Depending on your circumstances and agreement, you may be able to ask for forbearance – Forbearance allows you to temporarily stop making payments or reduce installment amounts for a limited amount of time depending on special circumstances but interest will still accrue.  Forbearance qualifications include major medical problems and/or bills, loss of job, or change in job status. More information on forbearance is available here.
  • For qualifying borrowers, deferment may be available to stop repayment without accruing interest –  One example of a deferment scenario is for active U.S military service members on active duty. However, deferment options may vary by the private student loan servicer, so it is important to contact the loan servicer(s) for details. More information about the difference between deferment and forbearance is available here.