Student loans are much like other loans. Your credit rating gets a boost when you make your payments on time. Likewise, when you fail to make payments on time, your loan could fall into a delinquent status, which also causes your credit rating to suffer.
While the government allows you a certain period of time (for most, it’s six months) to begin paying off student loans once you leave college, not all students are able to begin making payments. However, instead of communicating with their lenders, they often simply ignore the debt, which has a horrible effect on credit scores. To avoid negative credit impacts, lenders offer many options to students who are struggling to make their payments, including deferment or forbearance. These options keep loans in good standing, while allowing you to buy a bit more time to get into a better financial situation.
Student loans are viewed as “good credit” and when they’re in good standing, can help you qualify for other forms of credit later on. However, your credit score can take a dive if you pay off your loans too soon. This is because you benefit from having more than one type of credit. Your student loan is an installment loan, and once it’s paid off, while you’ll save money by not paying all of that extra interest to your lender, you will be potentially removing one type of credit from your credit report.
Many student loan borrowers worry that they’ve ruined their credit because they have defaulted on their loans. The good news is that it’s never too late to make things right. Options are always available to help you repay those loans and repair your FICO score. It might take some time, but if you’re dedicated to resolving the issues, you’ll get there, perhaps even sooner than you think.