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Ask an Expert, Student Loans, Credit Counseling, Credit Repair, Credit Reports and Scores

How will paying my deferred student loans affect my credit?

By Bruce McClary | Tuesday March 8th, 2022

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The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers.

I have about $17,000 in federal direct student loans, $9,000 of which is subsidized. The remaining $8,000 will begin accruing interest again after COVID-related 0% interest rates on student loans end, so I’d like to start paying that $8,000 down before then. I’m a grad student now, so I’m making (a little) income as a research assistant but also have a student loan deferment until I complete my master’s. My student loans are my oldest credit accounts, so they contribute significantly to my average age of credit. Is it a good idea to leave a small amount of money ($100 or so) due on each loan, just to keep the account open and maintain my age of credit until some of my other accounts get older, or should I just pay loans all the way down if I can? Also, will the credit bureaus interpret this as paying off debt and increase my scores? Or will it simply lower my loan balance/number of accounts and decrease my score?

Paying off your student loans early usually has more financial benefits than drawbacks. It will save you on interest and increase your monthly cash flow, giving you new opportunities to save or invest. Now, how paying your student loans affects your score will depend on your credit history now and at the time of your final payment. Sometimes, the effect is barely noticeable at all. The good news is that whatever it is, it’s temporary.

How do deferred loans show on a credit report?

Knowing how your student loans influence your score now can help you understand how they affect your score when you pay them off. Deferred loans show as active accounts on your credit report. The fact that you’re not making payments on your loans does not mean that your account is closed. It just means there’s an agreement between you and the lender to postpone the repayment period without negative consequences. Therefore, deferred loans don’t directly affect your credit score as they don’t contribute any significant monthly activity to your report. But the loans on their own positively influence your score because they add variety to your credit mix and increase the average age of your credit. On the downside, these loans increase your overall unpaid debt.

How does paying a student loan affect your credit?

There’s no one size fits all answer to this question; it varies for each consumer. So, if your student loans are your oldest form of credit, once you pay them in full, your score could drop as the average age of your credit decreases. However, if you have any other account, it will start to age as time passes, and it will help you establish a new older account soon. And if you don’t, consider adding a new credit line to your credit report. If you think about it, closing down your oldest accounts is unavoidable since you have to pay your student loans sooner or later. The best strategy is to be proactive and take action now that you have more time to establish a solid credit history.

Once you start making payments on your student loans, you will create a positive credit history, which will boost your score. This positive payment history is the most significant contribution your student loans make to your credit report and score. Even after your pay your loans, they continue to influence your score positively for about ten years.

Overall, it’s important to remember that your credit scores use an algorithm that considers all the information in your report each month. So, instead of focusing on keeping your oldest account open, review your credit report and determine which areas may need improvement. In general terms, a healthy credit report has a history of timely payments and low credit card balances.

The benefit from freeing yourself from student debt will help you become more financially independent to focus on other financial goals, including establishing a solid credit history. So, if paying your student loans in full is a possibility, consider doing so. If you would like personalized guidance to help you deal with your student loans or boost your score, contact an NFCC financial counselor. Counselors are a click or phone call away by visiting NFCC.org or calling 800-388-2227. Good luck!