Student loans and credit reporting

By: John Ulzheimer
Date: June 23, 2020

It’s no secret that, on average, consumers with college degrees earn more over their working lifetimes than those without. And, if you’re able to get in to a college or university, the chances are you’ll be able to finance it—and you won’t be alone. There is currently over $1 trillion in outstanding student loan debt in the U.S. To put that figure into perspective, there is about $160 billion more in student loan debt than there is in credit card debt.

For those of you who have taken out student loans to finance your education, there are a few credit reporting factoids with which you should become familiar:

  • First and foremost, student loan debt is reported to the three national consumer credit reporting companies (CRCs): Equifax, Experian and TransUnion.
  • A student loan is a type of installment loan, which means it has a fixed payment for a fixed period of time, like a mortgage or an auto loan.
  • And, like a mortgage, in many cases the interest you pay on student loan debt is tax deductible.

When it comes to credit reporting, student loans are normally reported on a disbursement basis. That means if you take four separate disbursements, one per school year for example, then you’ll have four separate student loans on your credit reports. And finally, even if your student loan is in deferment and no payment is currently due, the loan is still likely to be reported to the credit reporting companies.

Student loans and credit scoring

Student loans are seen and evaluated by credit scoring models just like any other debts that are reported to the CRCs. That means if you are managing your student loan debt properly by making payments each month, your credit scores will benefit. Conversely, if you are missing student loan payments or defaulting on your student loans, your credit scores will likely be poor.

When it comes to student loan debts, you’d be surprised how little negative impact they have on your credit scores as long as they are being paid on time. Generally speaking, installment debt is less predictive of elevated credit risk than other loan types and, as such, even large amounts tend to be much less problematic for your credit scores than, say, large amounts of unsecured credit card debt. The point being, $10,000 of maxed-out credit card debt is going to be much more damaging to your credit scores than $10,000 of properly managed student-loan debt.

To accelerate payback, or not

We all want to be debt-free, with no financial liabilities or monthly obligations. But, there is certainly good debt and bad debt when it comes to credit scoring and wealth building. Student loans fall in the category of “good debt,” primarily because their impact to your credit scores is minimal and the interest is tax deductible.

Compared to student loan debt, or almost any other debt, credit card debt could be considered “bad debt.” Interest paid on credit card debt is not tax deductible and even modest amounts can wreak havoc on your credit scores if your balances get too close to your credit limits.

If you are fortunate enough to find yourself in a position to make larger lump sum payments to your creditors, then it’s almost always a smarter financial move to pay off or pay down your credit card debt. Not only will your credit score benefit, but you will also save a considerable amount of money in interest that you will no longer be paying to your credit card issuers. The average interest rate on a credit card is around 15%, which is considerably higher than the average interest rate on student loan debt.