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How Do Student Loans Work With My Credit?

15 min read
By Brendan Harkness Aug 18, 2015 | Updated Jun 08, 2020

What Types of Student Loans Are There?

Student loans come from two sources: the federal government or private lenders.

There are several types, including:

It’s important to know which type of loan you have because they have different grace periods, meaning that you’ll be expected to start paying some back sooner than others.

Does your loan accrue interest before you begin paying it back? If so, it may be smart to start paying them back as soon as possible.

What’s the Difference Between Credit Card Debt and Student Loan Debt?

  • Credit card debt is revolving debt (you can repeatedly borrow and pay back the money, up to your credit limit)
  • Student loans are installment debt (you get a lump sum and then pay it back in fixed monthly payments)
  • Credit card debt tends to have a higher interest rate than student loan debt
  • The interest you pay on student loan debt is typically tax-deductible
  • Some student loans are federally guaranteed

Getting Federal and Private Student Loans

Federal student loans are not difficult to get. Any student with a financial need, as demonstrated on the FAFSA, is eligible. Loans are the one universal element of financial aid packages. (People with drug convictions, who are incarcerated or subject to involuntary civil commitment after incarceration for a sexual offense, and non-U.S. citizens are not eligible.) There is no age limit.

Private loans are subject to a credit check and underwriting. The best terms (comparable to the terms on federal loans) are only available to borrowers with outstanding credit and often require a cosigner.

Insider tip

Never pay a fee to submit the FAFSA. If you are asked for payment information, redirect your browser to

You may have a grace period from the time you graduate until it’s time to start your repayment plan. If you have federal student loans, the grace period is defined based on the loan type.

  • Direct Subsidized Loans, Direct Unsubsidized Loans, Subsidized Federal Stafford Loans, and Unsubsidized Federal Stafford Loans provide a six month grace period that is specific to the day of your graduation.
  • Perkins Loans typically have a nine month grace period. However, you should check with the school where you received your loan to be sure.
  • If you have private student loans, you will need to check with your lender as soon as you graduate to find out how much the first payment is and when it will be due.
Insider tip

It’s important to note that not all federal student loans have a grace period. For most loans, interest will accrue during your grace period.

You should take the grace period time to figure out the best repayment plan for your needs. Before you determine the best plan, you can use this repayment estimator to see which plans you may be eligible for and see approximately how much you will pay each month and in total.

Advantages of Federal Loans

For most borrowers, federal loans are the better option. Here’s why.

Subsidized Interest

On some types of federal loans, the government subsidizes (pays) the interest while the borrower is still in school.

Fixed Rate

On federal student loans, the interest rate is fixed. By contrast, on many private student loans the interest rate is variable which inevitably leads to higher interest charges.

Repayment Options

Federal loans offer a variety of repayment options, many of which are tied to the borrower’s income or job. Furthermore, borrowers who go into certain lines of work (law enforcement officers, teachers, librarians, and health or public service workers who serve needy communities, for example) are eligible to have their balances forgiven after ten years of payments.

Each repayment option is tailored to certain types of federal loans (they are not all available for all federal loans). Private lenders rarely, if ever, offer repayment options other than standard loan amortization.

Advantages of Private Loans

The Consumer Finance Protection Bureau (CFPB) notes that for some students, private loans offer a few advantages. Graduate students with great credit and a high degree of certainty of employment may get the best loan by shopping around. If the borrower plans to repay the loan within a few years (less than ten) and has already maxed out the most advantageous federal loans, a private loan might offer better terms than a federal loan.

The school’s financial aid office is the best resource for evaluating the specific options available. Private loans are not capped, like federal loans (the limit is set by the school and may not exceed financial need; students are expected to contribute a portion of their expenses through work or family contributions). Some borrowers may consider this to be an advantage, but the unlimited nature of private loans can quickly lead to crushing debt.

What Student Loan Repayment Plans Are Available?

You have many options when it comes to repayment. The standard method involves monthly payments over a period of ten years. Depending on your financial situation, job prospects, and amount owed, the Standard Repayment Plan may not be right for you. (Wondering how to pay off your debt? Read about debt repayment strategies here.)

We’ve put together a list of the options for Direct Loans and Federal Family Education Loans (FFEL).

  • The Graduated Repayment Plan requires lower payments early on with payments usually growing every two years.
  • The Extended Repayment Plan allows payments to be fixed or graduated up to 25 years. Students who have borrowed at least $30,000 can qualify for an extended repayment plan, which will have monthly payments lower than the standard plan.
  • The Income-Based Repayment Plan changes as your income changes. Your monthly payments will max out at 15% of your discretionary income (the difference between your adjusted gross income and 150% of the poverty guideline for your family size and state of residence). This will vary. You must have a partial economic hardship for this plan.
  • The Pay As You Earn Plan is similar to the income-based plan. Your payment changes as your income changes. However in this plan, your monthly payments will max out at 10% of your discretionary income. This will vary. If you fail to repay your loan in full after you’ve made the equivalent of 20 years of monthly payments, any outstanding balance on your loan will be forgiven.
  • The Income-Contingent Repayment Plan calculates your payments each year based on your adjusted gross income, family size, and the total amount of your Direct Loans. If you fail to repay your loan after you’ve made the equivalent of 25 years of monthly payments, the unpaid portion of your loan will be forgiven.
  • The Income-Sensitive Repayment Plan uses your annual income to calculate your monthly payment. With this plan, the individual lender may have a distinct formula for determining the monthly payment.

How Can You Pay Off Your Student Loans Effectively?

  • Skip the grace period: As soon as you start making an income, make a payment. Not only will you pay less interest, but being disciplined from the beginning will help ensure you make your payments on time every month.
  • Pay more than the minimum: If you can, pay more than the minimum required amount every month. The more you pay now, the less interest will accrue.
  • Switch your payments from monthly to bi-weekly: In this payment plan, you will pay less interest because there is less time for interest to accrue between payments. This also means you will end up making an extra month’s worth of payments every year.
  • Don’t carry a balance month-to-month on your credit cards: You don’t need interest piling up from credit cards on top of the interest from your student loans. Focus on the debt that costs you the most.
  • Pay off the loans with the highest interest first: Those loans will end up costing you the most, so get them out of the way early on. Consider the avalanche repayment strategy, rather than the snowball strategy.
  • Spend less on things you want and even things you need: Cutting out entertainment costs, unnecessary vacations, and some of your weekly food budget will add up quickly.
  • Look at the civil sector: Consider participating in public service as opposed to working in the private sector right away. Some or all of your loan debt can be forgiven.
  • Find help from employers: Look out for employers who offer tuition reimbursement or loan forgiveness. These are becoming more widespread.

Student Loan Mistakes to Avoid

1. Using Loans to Fund Every Aspect of College

You may be able to secure adequate student loans to fund four years (or more) of college, but all loans require repayment, and usually cost far more than what was originally borrowed based on the interest rate, and pace at which it accrues.

Set a “ceiling” for your student loans; most experts recommend borrowing no more than what you expect to make in your first year on the job after graduation. Make it your mission to uncover free money, understanding that it will take time and effort—but can significantly help manage the burden of your student loans.

For example, there are many smaller scholarships and grants available through non-profit organizations, business groups, local chamber of commerce, city government, and state. If your hobbies have related groups or associations, or you volunteer for causes, research opportunities related to those activities.

You may even qualify for scholarships based on some aspect of your heritage, health, or religion. Though these scholarships are usually a few hundred dollars, there is no limit to how many you can try to secure–and you never have to pay them back.

2. Not Researching School Price Tags

Take advantage of college cost calculators to research the specifics behind the “all in” cost of colleges (sometimes called the “fully loaded” cost), including stipulations like whether students must live on campus for a stated number of years, purchase food plans, supply their own technology, or pay for recreation centers, parking and transit costs as part of tuition enrollment.

If you’re able to take basic courses offered at a community college near home on academic breaks (and their credits will transfer), you may be able to save several thousands of dollars that you’d otherwise accrue in the form of loans. The community college route isn’t terribly sexy, but no employer cares where you took English 101. Taking it at Dekalb Community College is going to be considerably cheaper than taking it at Duke.

As long as the big name school is willing to accept the credits, then the community college route isn’t a bad idea. Besides, it’s the school name on your diploma that really matters, at least for your first and maybe second job. Eventually your diploma almost completely ceases to be important and employers will depend almost exclusively on your work experience.

3. Not Completing the FAFSA in January

Because schools have different deadlines for financial aid and processing takes time, completing your FAFSA (free application for Federal Student Aid) is the first step when you need to borrow for college, and should be done right after the new year. (You must complete a new one every year you intend to borrow for school; approval status and loan amount can change).  

Though there is a common misconception that students whose families make too much money can’t get government-backed student loans, who is approved for Federal loans and in what amount depends on “need,” which is based on a complex algorithm. Federal-backed student loans are the best you’ll find in terms of interest rate, grace period, and flexible repayment plans. Make sure you can’t access them, before you assume.

4. Not Viewing Student Loans as a Serious Debt

Because student loans aren’t always considered to be as “bad” a debt as credit cards, eliminating them can be low on a borrower’s financial priorities list. In reality, student loans may even be worse than credit card debt because filing bankruptcy won’t make them go away. Your repayment plan for student loans should be as strategic and aggressive as for any debt you carry—especially if you have income left at the end of the month to put towards it.

5. Making Late Payments

Late payments on your student loans can be a minor problem, if they are rare, or a bigger problem if they occur more frequently. Paying back your loans on time will not only reduce your balance on schedule, you’ll also improve your credit. However, missed and delinquent payments will have a negative effect on your credit.

How Do Late Student Loan Payments Impact Your Credit?

While any payment made after the due date is technically late, the ramifications of a missed student loan payment on your credit is all about timing. As soon as you fail to make at least the minimum payment due, your student loan becomes delinquent in the eyes of the lender.

At that point, you may be subject to late fees and additional penalties, including an increased loan interest rate. That said, the event cannot be reported to the credit reporting agencies (where it can affect your credit scores) until the loan is at least a full 30 days past the due date.

However, for Federal student loans, there may be an even longer reprieve as the delinquency will usually not be reported to the credit bureaus until it exceeds 90 days past due. For private student loans, missed payments are generally reported to credit bureaus once they’re late by 30 or 45 days past the due date.

These are not hard and fast rules — any lender can report you as late as soon as you’re 30 days past the due date. Point being, don’t roll the dice.

How to Manage the Impact of a Missed Student Loan Payment

Because timing is such a critical factor for the impact a missed student loan payment has on your credit, being proactive is key. For example, a Federal student loan that goes into default (defined as 270 days+ past due) can lead to very serious consequences, not the least of which may include garnishment of up to 15% of your future paychecks, and your tax refunds.

If your children will need Federal student loans when they attend college, your default can also make it impossible for them to secure the loans they need.

If your student loans are private, it’s likely that the lender will increase your rate, and may even demand that you repay the loan amount sooner than was originally agreed—and possibly, in full.

Call the lender as soon as you realize you’ve missed a payment to determine your repayment options going forward. Especially in the case of Federal student loans, there are countless flexible loan payback programs, including those based on your current income and financial status.

The worst thing to do is ignore the missed payment without trying to explain your situation. Generally speaking, as long as the missed student loan payment is an isolated incident that doesn’t remain unpaid past the 30 or 60 day late period, the incident will be minor overall, except WHILE the account is currently past due.

If late payments are recurring events, and/or extend past 90 days, your credit score will not be happy about it and can definitely be decreased. Furthermore, your credit-worthiness may be impacted for as long as seven years past the event.

Should I Consolidate My Student Loans?

If you have multiple loans from different lenders you may be able to consolidate them into a single loan. (Struggling with debt from credit cards too? Learn about consolidating credit card debt.)

If so, look into what your monthly payments will be like, as well as how long it will take you to repay the entire loan. If you can’t consolidate or don’t want to, we typically recommend focusing on the loans with the highest interest rates first.

This could be a benefit if you reduce the interest rates on your loans, but your total repayment time may end up being longer. Also, you could lose certain benefits if your loan is no longer serviced by a particular company, so be sure to understand the ramifications before you consolidate.

What Types of Consolidation Loans Are Available?

A consolidation loan can take many forms:

  • Personal loan: The debtor borrows money from a bank or another entity (including Lending Club or Prosper), either on credit (unsecured) or secured with collateral.
  • Home equity loan: A line of credit in which the debtor borrows money against the amount of home equity he or she holds (equity is the value of the home minus any amount owed against it).
  • Credit card balance transfer: The debtor transfers one or more credit card balances to a card that permanently or temporarily charges a lower interest rate.
  • Debt consolidation loan: The debtor borrows money from a bank or other entity for the express purpose of consolidating outstanding debt.
  • Student loan consolidation: The debtor takes out a single loan to replace multiple student loans.

When Does It Make Sense to Consolidate Debt?

It might make sense to consider debt consolidation if:

1. You have multiple debts and you feel highly burdened by them. If you have a hard time making ends meet and a new loan would significantly reduce your monthly minimum payments, then consolidation might ease the burden and stress and help you avoid default.

2. You can’t afford your minimum payments. If you have negative cash flow – your monthly expenses exceed your income – you need immediate relief. That may be possible with debt consolidation that lowers your monthly payments.

3. You are falling behind and your credit score is at risk. Millions of borrowers are behind. At least 35% of student loan borrowers under the age of 30 (in repayment) are 90 days or more delinquent. No matter what kind of debt you have, you need to get caught up to avoid fees and penalties that add to the debt. A pattern of late payments and delinquencies will hurt your credit score in a way that could take years to correct.

4. Your credit has improved enough to qualify for better interest rates. If you have balances on several credit cards that carry high interest rates but you can qualify for a loan or credit card with a significantly lower rate, you can save money by consolidating the debt to the account with the lower rate.

When Is It a Bad Idea to Consolidate?

1. When the original loan comes with benefits you don’t want to lose. Some student loans must remain in their original form or the borrower will lose certain benefits attached to them, like interest rate discounts. Student loans are also often eligible for deferment or forbearance, both of which give the borrower a temporary reprieve.

2. When the interest rate is higher than the rate on the original loan. Carefully check the terms of any consolidation loan you’re considering. A very low monthly payment is not worth extra years or decades of repayment on a high interest loan.

3. When the debtor is likely to run up new debt. Some borrowers take consolidation loans or balance transfer offers without closing the accounts. That leaves $0 balances on the old credit cards and a fresh chance to run them up again. Ultimately, the debtor is faced with a great deal more debt. If your debt problems were caused by irresponsible credit card use, close the accounts when you pay them off. If you keep one card for emergencies, don’t carry it, but instead make it difficult to access.

4. When the borrower is looking for cash. Cash back debt consolidation is not inherently a bad idea, but proceed with extreme caution. If your debt is large enough that you need consolidation relief, the smartest thing to do is apply every financial advantage to the loan balance. That said, home mortgages and home equity loans are often used to consolidate debt, with or without cash back, and with today’s low rates the monthly payment on the new balance can be lower than or equal to the sum of the previous payments. (The borrower who qualifies typically has very good credit.) Evaluate the terms carefully, and especially the number of additional years you’ll pay on the new debt compared with the number of years of payments on the old.

Alternative to Loan Consolidation

Consumers buried in debt should seek guidance from a certified credit counselor. A debt management plan may be more appropriate than a consolidation loan. In a formal debt management plan, multiple payments are combined into a single monthly payment. The counselor can also help the debtor create a budget and avoid new debt during the repayment period, usually 36-60 months.

Loan Forgiveness and Forbearance

If you work for a nonprofit or government organization, you could be eligible to have your remaining loans forgiven after 10 years.

Eligible organizations include:

  • Public education
  • Early childhood education
  • Public libraries
  • Public health services
  • Law enforcement
  • Public interest law

Loan Forbearance

Forbearance is an option you should avoid at all costs. In the event you are unable to make your scheduled loan payments, but don’t qualify for a deferment, you may be granted a forbearance. Forbearance allows you to stop making payments or reduce your monthly payment for up to 12 months. Keep in mind that interest will continue to accrue on your subsidized and unsubsidized loans.

Insider tip

You won’t receive loan forbearance automatically. You will have to apply by making a request to your loan servicer. Sometimes you are required to provide documentation to support your request.

Can Cosigning For a Student Loan Hurt My Credit?

“I want my son to be able to go to college and he has asked me to cosign for a student loan. Is that a good idea, or not?”

The answer is “yes” — when you cosign for a loan or credit card, you are legally liable for the debt. If your child fails to pay back his or her student loan, you’ll be getting phone calls for the bill.

Cosigning for a loan, any loan, can be a bad idea. It’s really no different than you taking out the loan on your own, as the lender sees you as just as liable as the other cosigner. You’ve just become what’s referred to as a co-obligor and there’s typically nothing you can do to get yourself off the hook except pay back the loan, in full.

According to a story on the CNNMoney website, “As many as three out of four co-signers are called upon to repay loans that have gone into default, according to the Federal Trade Commission.” This makes co-signing a very risky proposition. It pays to understand the responsibilities and potential financial and credit risks you’re taking on when you co-sign for a student loan. Below are five things to consider before you co-sign on a student loan.

You’re Impacted by the Student’s Lifestyle Choices

Part of your consideration regarding whether to co-sign for a student loan should include a discussion and agreement around plans for loan repayment, including when you as the co-signor will be “released” from your responsibility. (Student loan terms vary, but some private lenders allow a co-signor to be removed from a loan after a stated number of consecutive payments are made).

That said, if the student drops out of school, or violates university policies and is suspended or kicked out of school, for example, the loans must still be repaid. If the student is overcharging on credit cards while attending college, it’s a likely sign that the student loan balance will remain part of your financial obligations for some time. You can plan for the best case scenario, but remember that to some degree, your financial future is in the student’s hands.

You’re Impacted by the Economy Graduates Face

According to a TransUnion study, more than half of student loans are in “deferred” status, and the average student loan debt per borrower is nearly $24,000. Worse yet, more than 40% of recent college grads are unemployed.

Regardless of how much you trust the student you for which you co-sign, it’s hard to repay student loan balances when you lack income, and even harder if there are additional debts. Though government loans offer flexible repayment programs, private lenders aren’t typically forgiving about student loan repayment.

One late or missed payment may mean an increased interest rate, and possible demands to repay the loan more aggressively. If the student fails to make a payment past a certain point (usually between 30 and 45 days past due for private student loans), the late payment will reflect on their credit history, and yours, until the matter is resolved. If missed payments are recurring incidents, they’ll be reported on your credit history and the students, and can stay there for as long as seven years.

You’re Responsible If They Walk Away

If the student you co-sign for decides he or she simply can’t repay the loan—you’re responsible for the balance in full. It can’t be discharged by a bankruptcy. You’ll pay it, or you’ll die with it.

Your Debt-to-Income Ratio Is Impacted

As soon as the student loans for which you co-sign are due for repayment, the balance of the loan is considered in your debt to income ratio. Co-signing for a student loan could impact whether you’re approved for new credit, based on your income, the size of the loan, and other debts you hold.

Student Loans Will Impact Credit Mix — But Not Necessarily Your Score

Age of accounts and credit mix are factors in how your credit scores are tabulated, but the impact that co-signing on a student loan has on your credit in those regards will depend on your existing financial situation.

Nonetheless, it’s a new installment loan account (or accounts, if you co-sign for multiple loans) for which you are responsible until the student makes the necessary consecutive payments to have your name taken off the loan, and/or pays it in full.

This can turn out to have a neutral or even positive effect if the loan is paid back responsibly; however, the high rates of default and forbearance for co-signed student loans still make this a risky option.

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