How do student loans affect your credit score?

How do student loans affect your credit score?

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Many aspire to pursue higher education in fields like MBA, Engineering or other PG courses. These courses can offer better opportunities and learning experiences. However, it also comes with a high cost that may not be affordable for many students like you. That’s why opting for student loans to fund education is the right choice.

Student loans have become a boon for many underprivileged students who want to pursue higher education in India. According to a report by ICRA, the education loan portfolio in India grew at a compound annual growth rate (CAGR) of 17% from Rs 48,400 crore in March 2013 to Rs 75,450 crore in March 2018. The report also projected that the education loan portfolio would grow at a CAGR of 11% to reach Rs 1.4 lakh crore by March 2025.

What is your credit score?

Sometimes classified as ‘good debt,’ student loans may be one way to establish a good credit history – if they are paid off responsibly.

Your credit score is a three-digit number that reflects your creditworthiness based on your past and current credit behaviour. It ranges from 300 to 900, with higher scores indicating better credit health. Your credit score is calculated by credit bureaus like CIBIL, based on factors like your repayment history, credit mix, credit utilization and credit inquiries.

Your credit score matters because it determines your eligibility and interest rate for any future loans or credit cards. A good credit score can help you get lower interest rates and better terms for your loans. A bad credit score can make it difficult or expensive for you to borrow money.

Student loans can affect your credit score in a positive way. These loans can help you build a good credit history if you repay them on time and in full. They can also diversify your credit mix and show your ability to handle different types of loans. However, keep it in mind that loans for students can hurt your credit score if you default or delay your payments.

Here’s what you need to know about how student loans can affect your credit score.

Can student loans positively impact your credit?

Yes, if you handle them responsibly, they can boost three out of the five factors that determine your credit score: payment history, length of credit history, and credit mix. Student loans can effectively:

  • Build positive payment history: To establish a positive payment history, paying your student loan bill on time and in full every month is crucial. Making small payments ahead of schedule may also improve your credit score.
  • Establish credit length: As college students may have a limited credit history, having a co-borrower can help. Although not all loans for students require a credit check, they will all be included in the borrower’s credit file.
  • Create mix: A diverse credit mix, including various types of credit such as student loans, credit cards, auto loans, and mortgages, is also important. If you don’t have a long credit history, having a good credit mix can have an even greater impact on your credit score.

Also Read: 7 advantages of taking a loan for higher education

Does paying off student loans help your credit score?

Paying off student loans can affect your credit score in both positive and negative ways. On the positive side, paying off student loans can help you build a good credit history if you repay them on time and in full. They can also diversify your credit mix and show your ability to handle different types of loans.

On the negative side, paying off student loans can hurt your credit score if you default or delay your payments. They can also increase your credit utilization and debt-to-income ratio, which can lower your score. Moreover, applying for multiple loans for students in a short span of time can result in hard inquiries on your credit report, which can temporarily reduce your score.

According to a report by DNA India, paying off student loans early can also help you save on interest payments and reduce your debt burden. For example, if you borrow an education loan of INR 20 lakh for 15 years at an interest rate of 9.45% per annum, the interest amount you will have to pay for it will be INR 17,48,355. And if you choose a 10-year tenure, the total interest you will pay is INR 10,98,975. So, you can see if you pay off the loan early you will be able to save up to INR 6,49,380.

What happens if you don’t pay off student loans?

Not paying off your student loans can have serious consequences for your financial and legal situation. Here are some of the possible outcomes of defaulting on your loan:

1. Your credit score will be severely impacted:

 Failing to pay your student loans within 90 days (in most cases) classifies the debt as delinquent, which means your credit rating will take a hit. After 270 days, the student loan is in default and may then be transferred to a collection agency. This will further damage your credit score and make it difficult for you to get any future loans or credit cards.

2. Your assets and income may be seized: The lender can take legal action against you and your co-borrower or guarantor to recover the debt. They can attach any bank accounts or property you have as collateral or security. They can also garnish your wages or tax refunds to repay the loan. This can affect your livelihood and financial stability.

3. You may face legal trouble:

The lender can sue you for non-payment of the loan. You may have to face court proceedings and pay legal fees and penalties. You may also face criminal charges if your failure to repay is based on fraud. This can affect your reputation and career prospects.

 Therefore, it is advisable to avoid defaulting on your student loans and try to repay them as soon as possible. You can contact your lender or loan servicer and negotiate for easier terms or repayment options. You can also seek help from government schemes or organizations that provide interest subsidy or loan forgiveness for eligible students.

Also Read: What you should know about qualifying for an education loan

How to improve a low credit score?

To improve a low CIBIL score, it is important to follow a few steps:

  • Firstly, avoid taking too many loans or credit cards. 
  • Secondly, make sure to clear all your outstanding dues. 
  • Thirdly, pay your credit card bills on time and in full, rather than just paying the minimum amount due. 
  • Finally, set up an Electronic Clearing System (ECS) for your EMIs to ensure you never miss a monthly payment.

How to manage student loans like a pro?

Now that you understand how student loans can affect your credit, it is important to adhere to these rules to ensure that your student loan debt benefits rather than harms you.

  • Only borrow what you need. Only take out loans for essential college expenses and avoid borrowing extra money for non-educational expenses like eating out or car payments. It may be tempting to accept the full amount offered, but borrowing only what is necessary is crucial since excessive debt can make it difficult to repay. Remember, just because you are offered a certain amount does not mean you must take it.
  • Pay every bill on time and in full. The initial payment is the one that is most likely to be overlooked, so it’s essential to set a reminder in your calendar for two weeks before the due date. Once you’ve accounted for your loans, enroll in automatic payments. 
  • Let your lender know if you need help. If you’re having trouble making payments on time, notify your lender right away. They can assist you in determining which repayment option, such as income-driven repayment, deferment, forbearance, or another alternative, is best suited for you. It’s crucial not to let your situation reach the point of late payments or default because it’s significantly more challenging to recover after that point.
  • Graduate. Graduating can help you avoid the fear of struggling with loans for student and the possibility of default. To ensure that your loans remain in good standing, it’s essential to graduate and increase your chances of finding a job that can provide the income you need to pay back the debt. 
  • Consider alternatives. If student loan payments are too much for your budget and your lender isn’t providing sufficient options, you can explore alternatives like student loan refinancing or forgiveness. Refinancing can help make your payments more affordable, but it may also extend your payment period, leading to higher overall interest costs. 

If you have a co-borrower with a high income and a good credit history, you will be able to get the best interest rate on the borrowed amount. Varthana student loan is the most cost-effective way to pursue higher education without jeopardizing your bank balance. Varthana loans for students are obtained jointly with parents or guardians. Your co-borrower must submit proof of income as well as other documentation in this scenario. If the course you want to take and the institute you want to attend are both on Varthana’s database, you may easily apply for a student loan based on your qualifications


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