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When you're thinking about student loan repayment, your biggest concern might be how it affects your budget. But you also need to give some thought to how your loan payoff might affect your credit score. Practicing good student loan repayment habits can lay the foundation for a good credit score, which can be an advantage in the future when you're trying to finance a car or buy a home, among other things.

As a college student or recent graduate, you may not have an established credit history. So if you have student loans, these may be your only tool for building your credit history and score. If you're already repaying your loans or you're about to begin, here's how to improve your credit score while wiping out your student debt.

Know what helps your score

There are several things that can help you improve your credit score as you repay your student loans. They include:

  1. Making your monthly payments on time
  2. Paying down your debt balances and avoiding new debt
  3. Using different types of credit (such as credit cards, car loans, student loans, or personal loans)
  4. Having older credit accounts (a longer credit history can help your score)
  5. Limiting how often you apply for new credit

Of the five, the most important thing is making your payments on time every month. Late payments can lower your score and linger on your credit history for seven years. That can make it more difficult to get approved for a credit card, student loan consolidation or refinance, or other types of loans in the future.

Choose the right repayment strategy

If you want to make your student loans more budget-friendly, or if you are having trouble repaying, you may have some options:

  • Consolidating or refinancing
  • Signing up for an income-driven repayment plan for federal student loans
  • Requesting a deferment
  • Applying for a forbearance

Each one of these options can help with student loan repayment in different ways. Before choosing one, however, you need to also be aware of the credit score impact and any consequences such as increasing the overall cost of your loan.

Consolidating or refinancing

Consolidating federal student loans allows you to combine multiple federal loans into one. This gives you a single monthly payment and a new fixed interest rate that is a weighted average of the rates you were paying on each loan, rounded up to the nearest one-eighth of a percent. No credit check is required for a federal consolidation loan, which means a hard inquiry won't show up on your credit report.

Refinancing student loans through a private lender is a little bit different. It involves taking out a new private student loan to pay off your old student loan(s). The main benefits are lowering your interest rate and payment, which can make it easier to pay each month. You also streamline your payments so you are paying one bill each month, which is helpful if you were previously paying multiple loan servicers each month. Keep in mind that if you increase the time it takes to repay the loan, you can end up paying more in interest over the life of the loan. Unlike consolidating federal student loans, refinancing through a private lender involves a credit check, which may lower your credit score a few points. Many lenders let you check your rate with a soft pull, which doesn’t affect your credit. However, the tradeoff is being able to lower your interest rate, make your payments more manageable, and hopefully pay off your debt more quickly.

Before deciding if consolidating your student loans is right for you, consider the possible benefits and impacts of a consolidation loan and what works best for your situation.

Income-driven repayment plan

Income-driven plans are available for federal student loans, including consolidation loans. These plans can make payments more manageable because payments are based on a percentage of your discretionary income. Any loan balance left at the end of your repayment period will be forgiven if you qualify. You could improve your credit score with an income-driven repayment plan if it helps you make payments on time. Keep in mind that you may be required to pay income tax on any forgiven student loan debt.

Deferment and forbearance

A deferment or forbearance lets you pause payments for federal and private student loans. Deferment and forbearance can cover situations such as being enrolled in school, active military duty, public service, financial hardships, and unemployment. Options vary by loan type, so check with your lender or servicer for the kinds of deferment and forbearance they offer and the terms to qualify. 

While taking a deferment or forbearance can be helpful temporarily if you can't make your payments, it will affect your future payments. In most cases, interest continues to accrue during periods of deferment and forbearance, and it's added to your loan balance once you resume payments, which makes them higher. 

If you decide to take a deferment or forbearance, keep these things in mind so you don’t miss any payments and impact your credit. First, do the math to make sure you can afford to make the higher payments after the program ends. If you can make any payments during the deferment or forbearance, it will help offset the accruing interest, which reduces what gets added to your balance. Also, remember to continue making payments until the program takes effect, which can be several weeks after you are approved. 

Good repayment habits can lead to good credit

Having a good student loan repayment plan can help you avoid issues with making payments. Paying on time is a key component of how to improve your credit score when you're new to building credit. If you need help managing your payments, getting in touch with your lender or servicer before you start having trouble is important because they may have options for you. Their goal is to help you successfully manage repayment.

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