Written by Kevin Payne 

For many college students, student loans are the first foray into financial commitments. Paying down your loan debt is a major accomplishment that can take time. It can also have an affect on your credit score, which can be good or bad depending on how disciplined you are with payments. 

Building credit now can open up the door to more opportunities for future goals like buying a car or putting a down payment on a house. So can paying off your loans early, but do these two goals coincide? Student loan payments not only get you closer to your goal of a zero balance, but they can help you build a positive credit history. 

How your credit score is calculated

Several credit score models exist, but the most used model among lenders is the FICO score, created by the Fair Isaac Corporation. FICO scores use data from your credit report in five categories to calculate an overall credit score. [1]

  • Payment history (35%): Lenders consider late or missed payments as a lending risk. Payment history considers your history of paying off credit. 
  • Amounts owed (30%): Amounts owed compares your total credit balance versus your total available credit. 
  • Length of credit history (15%): The age of your credit lines, including the oldest and newest credit lines, and the overall average of all credit accounts. 
  • Credit mix(10%): FICO scores consider the types of credit accounts you have, including credit cards, installment loans, retail credit lines, mortgage loans, and more. 
  • New credit (10%): [2]

How student loans impact your credit score

Student loans can affect your credit, no different from other types of lending. Student loans work like other installment loans, like auto loans or mortgages. As you pay down your loan debt, your loan servicer reports payments to the three major credit bureaus. When you pay off a loan, the account is closed, unlike a revolving credit account. 

The impact of your score can be positive or negative depending on your situation. Making on-time payments each month helps build a positive payment history and reduces your overall debt. Late or missing payments can remain on your credit report for up to seven years and can cause your score to drop. [3]

Student loans can also affect your credit age, mix, and utilization. For younger borrowers, student loans may be the only installment loan on file, giving your credit mix more diversity. If you pay off your student loan, it might mean losing that diversity and could temporarily lower your score. Your credit age will increase the longer you pay off your loans, but could drop when you pay off your loans. Having a more diverse credit mix or longer credit history is no reason to avoid paying off your student loans, though. 

The more you borrow to pay for school, the higher your credit utilization and debt-to-income ratio. Experts recommend keeping your credit utilization under 30% of your total available credit.  [4]

Federal student loans, outside of PLUS loans, don't require a credit check. If you apply for private student loans, lenders perform a hard credit check to determine your eligibility and set rates. Credit checks can cause your credit score to drop temporarily. Many lenders allow you to prequalify or check rates before applying without negatively affecting your score. 

The benefits of a good credit score

A higher credit score opens up more opportunities for consumers. including lower interest rates and more lending options. Other benefits of a good to excellent credit score include: 

  • Higher credit limits 
  • Home insurance discounts
  • Lower credit card interest rates
  • Better access to utilities and cell phone service
  • Making a better impression on potential employers [5]

Paying off student loans can improve your credit score

Paying off your student loans can also affect your credit score. There's a chance that your credit score could drop a few points temporarily as your credit age and mix change. However, depending on how much you borrowed, paying off loans could mean a significant drop in your credit utilization. You'll also benefit from making responsible payments on your loan. Generally, you should see your credit score increase over time by paying off student loans  

Federal student loans automatically come with a standard ten-year repayment plan, although you can apply for other repayment plans that can extend repayment up to 20 or 25 years. 

For many borrowers, the thought of spending decades paying off student loan debt is overwhelming. While arguments can be made that it's sometimes smart to extend repayment, paying off loans early provides a sense of relief and can free up time and headspace to focus on other life and financial goals.