The views and opinions expressed in this article are those of the author (credit expert John Ulzheimer) and not necessarily those of VantageScore Solutions, LLC.
Another school year is right around the corner and millions of students will be headed to colleges and universities to further their educations. Many of those students will be taking out loans to help pay for their tuition and other college related costs. These loans are commonly referred to as “student loans.”
Student loans are very similar to other installment loans. They are an extension of credit. There is an obligation to pay them back, with interest. And there is, of course, credit reporting and credit scoring considerations associated with the process of managing student loans. So, how do student loans impact credit scores?
Multiple Disbursements Equal Multiple Tradelines
Over your college career you may pay tuition multiple times, depending on how many years you spend being a student. Each time you get money from your lender it’s called a disbursement. Each disbursement is reported to the credit reporting companies as a separate loan. So, for example, if you take six disbursements over your college career then you will have six student loans appearing on your credit reports.
Despite having so many loans, you will likely only have to make one payment once your loans come out of deferment. Your payment will be distributed across all of your loans by the loan servicer. This is certainly much more convenient than you having to make multiple payments each month to what is essentially the same lender or loan servicer.
Another upside to the multiple disbursement structure of student loans is the fact that you may end up graduating from college with not only a degree but also well-established credit reports containing several student loans that are all in deferment and in good standing. This is certainly going to pay benefits for your credit scores and future credit prospects.
The Impact on Your Credit Scores
The impact of student loans on your credit scores is not that different than the impact of any other installment loans. If you make your payments on time then you’ll have several positive tradelines on your credit reports. And of course, credit scoring models reward consumers who have positive information on their credit reports.
If, however, you start missing payment on your student loans then you’re going to end up with several loans that are reported as delinquent. This can be problematic for your credit scores. Accordingly, it’s very important to always make at least the minimum payment on all of your student loans, just as it is important to make payments on all of your credit related obligations.
I have heard from some concerned consumers that having so many different loans with balances looks bad to lenders. To put them at ease I explain that as long as you make your payments on time and your loans are in good standing then you really are in the best position possible, other than having zero balances on your loans.
While you may have multiple loans appearing on your credit reports, you only have one monthly payment obligation. As in, you only make a single payment to satisfy your payment requirement. This is good news because your debt-to-income ratio, a common metric considered by lenders, will only consider your single monthly payment obligation, not your payment obligation times the number of loans on your credit reports.
For example, if you are required to make only one payment of $350 to cover the minimum payment on six student loans, a proper calculation of the debt-to-income ratio is not going to interpret that as you owing $350 per month, times six loans.
After They’ve Been Fully Satisfied, Enjoy The Benefits For Ten Years
Student loans, like most installment loans, can take many years to fully satisfy. However, once they have been paid in full they will again look remarkably similar to any other paid installment loan. The loans will be updated one last time by your servicer to indicate they are now paid with a zero balance and now have a zero “scheduled monthly payment amount.”
This final update indicates to anyone who pulls your credit reports that your obligations have been fully satisfied. If the loans are in good standing, meaning you’ve always made at least the minimum required payment, then the credit reporting agencies will allow them to remain on your credit reports for another ten years. This is very consumer friendly as having many good accounts that have been fully satisfied can be considered the credit equivalent as a badge of honor.