How Student Loans Affect Your Credit Score

With payments from federal student loans paused since the CARES Act ended in March, millions of lenders saw their federal direct student loans automatically go into overdraft – and increase their credit scores.

In fact, according to a new report from the Federal Reserve Bank of New York, the average credit score of all student loans increased nine points, from 647 in March to 656 in June.

Protecting CARES law has prevented lenders’ accounts from falling into disrepair, says higher education expert Mark Kantrowitz. Although the status of repayment of federal student loans is reported to all three credit bureaus, the CARES Act specifies that break student loans must be reported as current on credit reports, Kantrowitz tells CNBC Select.

The Fed’s report suggests that, as a result, reducing these delinquent loans, as they were forgotten, caused an uptick in credit scores.

But while the delayed period has provided relief for many lenders who needed it, experts warn that this fresh start is only temporary.

“The promise will eventually end, and credit scores will return to Earth,” said Gordon Achtermann, a Virginia-based certified financial planner.

CNBC Select spoke with student loan experts about why lenders should be aware of these programs, even if they increase their credit scores.

The coronavirus-related safety nets available to student loans have presented a great opportunity for significant problems to restore stability and prevent default, says Bruce McClary, a spokesman for the National Foundation for Credit Counseling (NFCC). However, he warns that the underlying circumstances that cause individual financial difficulties in the first place – such as a lack of savings or too much credit card debt – may not be resolved before the federal program for deferred student loans expires.

Unsecured consumer debt amounts to a whopping $ 1.4 trillion, says McClary, and those who have reached out to the NFCC to help manage their debt come up with an average of $ 16,000 in debt over five credit card accounts.

“Even with some recent increases in consumer savings rates, most Americans are nowhere near where they need to be to survive another major financial crisis,” McClary says. “A recent example of this is from the furlough of last year’s federal employee. It was only a matter of weeks before many families ran out of cash after stopping their payment transactions.

“That leads me to believe that some will just end up back where they were as worse when the moratorium on payments and interest ends,” he says of student loans.

Travis Hornsby, a managed financial analyst and founder of Student Loan Planner, has his own fears. He worries that the longer lenders keep their payments, the greater the chance that they will spend the money they would have on student loans to use for other things. Then, if the suspension is finally lifted and payments resume, these lenders will not have the money left to pay them.

For lenders who are dealing with extended periods of hardship, make plans outside of the temporary relief programs and consider affordable repayment options that can help keep your loans out of default.

To take advantage of their improved credit score and low interest rates, student loans should consider refinancing all debt, including private student loans. “Now is the time to do it,” Achtermann says.

Just make sure you understand all the fees involved and remember that you probably need more than just good credit to qualify for a refinance; you will also need to see stable employment, says Kantrowitz.

If your credit score has gone up in the last few months, it’s important to note how it can return just as easily as the federal protections end. (President Donald Trump’s latest memorandum extends the relief until the end of the year.)

Your history of student loan payments has a greater impact on your credit score than your overall balance, Hornsby notes. In fact, he says, credit bureaus do not seem to owe you five times your income debt, as long as the required payments are made on time and in full.

“Someone with $ 10,000 in debt can have a credit score 200 points lower than a dentist who owes $ 700,000 but who makes $ 700 a month on income-based payments at the time,” says Hornsby.

For any type of loan, making sure that your loans and credit card balance are paid on time (and fully if you can) should be a fundamental financial goal.

To track your credit score, sign up for a free credit monitoring service like CapitalWise® from Capital One and Experian Free Credit Monitoring. If you do not mind paying a monthly fee for additional services, consider our top-rated IdentityForce® or FICO® Advanced service for the most accurate credit updates.

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