If the borrower misses a deadline or makes a mistake, the cosigned loan can hurt the cosigner’s credit score.

Unfortunately for cosigners, DTI and credit score are the two most important factors creditors use when evaluating mortgage, car loan, and credit card applications.

Today we will examine how cosigned student loans impact the cosigner’s credit score and DTI. We will also look at some strategies to minimize or eliminate this impact.

Cosigned Debt is Your Debt

In most cases, lenders and creditors will treat cosigned debt as your debt when evaluating applications.

Your credit report shows a total balance, monthly payment amount, and repayment history. In some cases, it doesn’t show that the loan is cosigned or that the cosigner is not the principal borrower.

Why?

Lenders don’t care. As far as a potential creditor is concerned, you may have to start making payments on the debt. In most cases, they assume that you will be making payments on the debt.

Because almost all lending decisions are made using an automated computer algorithm, cosigners don’t get to explain themselves or demonstrate that the primary borrower is responsible and able to make payments.

One Possible Exception: Some mortgage lenders will exclude cosigned debt from mortgage applications. However, the cosigner usually must show that the primary borrower can make payments independently and has been doing so for at least a year.

If the primary borrower is still in school or on a deferment, the cosigned debt will almost certainly be treated as the cosigner’s own debt.

Debt-to-Income Ratio (DTI) Damage from Cosigned Loans

Because most cosigned loans are “counted against” the cosigner, the most common negative consequence is that it hurts the cosigner’s debt-to-income ratio, usually shortened to DTI.

An applicant’s DTI is critical when applying for a mortgage, car loan, or credit card. Lenders often deny applications if the high monthly bills on your credit report eat up a large portion of your yearly income.

For example, mortgage lenders like to see a DTI below 41%. If you have a modest income and cosign large student loans, getting approved for a home loan will be tough.

Credit Score Risk Only Impacts Some Cosigners

Things are a little less bleak on the credit score side of the equation.

The big risk to a cosigner’s credit score is if the borrower fails to make payments.

If the borrower doesn’t make payments on the cosigned loan, the cosigner has two options:

1. Start making payments on behalf of the cosigner.
2. Live with the damaged credit score and other fallout from failing to make payments on the loan.

It’s worth noting that the cosigner is legally obligated to pay if the borrower fails to make payments. The credit score damage is just the beginning of the issues if the payment is unaffordable for both the borrower and the cosigner.

Removing Cosigners Can Fix DTI and Credit Score Issues

Given all of the risks with a cosigned loan, it isn’t a surprise that many cosigners want to be removed from the loan.

Some lenders even advertise a cosigner release program to entice people to use their services. Sadly, the cosigner release programs are more myth than reality, according to the Consumer Financial Protection Bureau.

Lenders have every incentive to deny the release application. If they grant the release, they only have one person legally responsible for the loan. For this reason, many lenders require the primary borrower to have made at least a year of payments AND pass an additional credit check.

However, if the borrower has a great interest rate on their loan and has built up a strong payment and credit history, seeking a release is a worthwhile effort.

Once the cosigner release is granted, the debt falls off the cosigner’s credit report, solving the DTI issue and preventing future credit score problems.

Cosigner Release Guide: A cosigner release isn’t the only way to remove a cosigner from a loan. Several other strategies are available to remove the debt from the cosigner’s credit report.

Steps When Cosigner Removal Isn’t an Option

If the lender won’t approve the cosigner release, refinancing the debt is a commonly used shortcut.

The process is relatively simple: The borrower applies to refinance their private student loan. If approved, the new lender pays off the old loan, and the borrower begins repayment on a new loan with new terms.

If the cosigner isn’t on the new loan application, they are free from the debt.

Steps to Take if the Borrower Can’t Qualify to Refinance

The refinance option is great when the primary borrower has finished school and begun loan repayment. Refinancing will be much more complicated if the borrower is still in school or struggling financially.

In this instance, cosigning a second time could make sense.

By going this route, the cosigner’s legal responsibility hasn’t changed. However, refinancing might offer lower payments and/or a lower interest rate.

If the refinanced loan has a dramatically reduced monthly payment, the damage to the cosigner’s DTI is likewise reduced. For example, refinancing a 5-year loan into a 20-year loan could result in significantly lower monthly payments.

The downside is that interest spending may increase. However, the borrower can still pay extra to pay off the loan as initially planned; they just have the flexibility of a lower monthly payment.

As the primary borrower’s finances improve, they could refinance a second time to remove the cosigner completely.

As of November 2024, the following lenders advertise the lowest interest rates for 20-year fixed-rate refinance loans:

Rank	Lender	Lowest Rate	Sherpa Review
1		6.08%*	Splash Financial Review
2		6.53%	ELFI Review
3		6.55%	Laurel Road Review

The post How Cosigned Loans Can Wreck Your DTI and Credit Score appeared first on The Student Loan Sherpa.

Interest rates on credit cards are notoriously high. Getting out from under credit card debt is often a major financial obstacle.

However, getting a credit card is still essential for most college students.

Credit Card Benefits for College Students

Many credit cards include perks for users like purchase protection, miles, points, or some other reward. These benefits can be valuable, but they are not the reason that college students need to get a credit card.

The biggest benefit for college students is establishing a line of credit that will age with the student.

Credit age is a significant factor in determining credit scores. For many college students, a student loan is the oldest item on their credit report. When student loans are paid off, the removal of the oldest item from the credit report can cause credit scores to drop.

That last point is worth repeating: paying off your student loans can cause your credit score to drop.

Sherpa Tip: The damage to credit scores from eliminating a student loan is typically small and short-lived. It shouldn’t prevent people from paying off their loans.

The best way to mitigate this issue is to have a credit card. A credit card account can stay open indefinitely without costing the user any money.

An aged credit card account may make things easier when the time comes to buy a house.

Using a Credit Card Responsibly in College

Having a credit card account and using it responsibly are two very different things.

For most college students the best bet is to do the following:

• Get a card without an annual fee. The purpose of the first credit card account is to build your credit profile. You don’t want to have to pay a yearly fee for the next 30 years.
• Pay off the balance in full each month. If you pay the full statement balance each month, you won’t get charged any interest.

Going this route is more than just a great way to build your credit score. It helps people track their monthly spending and get into good financial habits.

Credit Cards and Irresponsible College Students

Not all students are great with money. Some will max out their first credit card, miss payments, run up a ton of interest, and damage their credit report.

I’d argue that it is ok when something like this happens.

The consequences of poor credit card decisions can be devastating, but they are minor compared to the dangers of student loan debt.

Credit card limits for most college students are relatively low. If things get really bad, bankruptcy is usually available for credit card debt. With student loans, borrowers can easily rack up six figures of debt. Bankruptcy rarely works out for student loan borrowers.

Simply put, credit card mistakes can cause months or years of regret while student loan mistakes can result in a lifetime of regret and struggle.

If you are someone who has to learn things the hard way, it is much better to make your mistakes with a credit card.

Credit Cards vs. Student Loans

Many people are justifiably fearful of credit cards, credit card companies, and credit card debt.

This same concern rarely gets applied to student loans.

However, when it comes to personal finance, student loans are the deep end of the pool. Whether you sink or swim with your money management, it is better to find out first with credit cards.

The rewards for credit card success in college are valuable, and the dangers from mistakes are dwarfed by student loans.

The post Credit Cards and College: An Easy Decision appeared first on The Student Loan Sherpa.

Thus, it shouldn’t come as a surprise that student debt impacts the complicated credit score formula in many different ways.

In this article, I’ll untangle the many different ways student loans may move your credit score up or down. I’ll also share some strategies to help you leverage student loan opportunities into a better credit score.

The Basics: How Student Loans Impact Credit Scores

Before generating a strategy to help your credit score, it is important to first understand the basics.

Three Ways Student Loans Help Your Credit Score

On-Time Payments – Payment history is a huge component of credit scores. If you are making timely monthly payments, you are helping your cause.

Diversified Credit Mix – Lenders want to see that consumers have managed different types of accounts over the years. Student debt adds to the diversity of your credit profile.

Length of Credit History – A limited or non-existent credit history is a significant issue. The longer you have been in the system, the better your score. For many borrowers, their first student loan is the oldest item on their credit report.

Three Ways Student Loans Hurt Your Credit Score

Late Payments – Missing a payment is obviously bad for your credit score. A single late payment can mean a drop of 180 points. Keeping up with student loan bills is often a challenge. As a result, large student loan bills are a massive threat to credit scores.

New Loans Hurt – New student loans can hurt your credit score in two ways. First, the inquiry required to get the new student loan may cause a temporary drop in your score. Second, the new loan lowers the average age of your credit history.

Default – If missing a payment is bad, defaulting is devastating. A default can last on your credit report for up to seven years, and lenders will be reluctant to loan you money in the future.

The Big Credit Impact that Doesn’t Change Your Credit Score

If you are worried about your credit score, it is probably because you want to qualify for new lines of credit, such as a mortgage or car loan, in the future.

It is crucial to remember that credit score isn’t the only number that lenders consider. Your debt-to-income ratio, or DTI, is just as important as your credit score.

When lenders make a credit decision, they look at the monthly debts of a consumer and compare them to the monthly income of the consumer. If you have monthly bills that eat up most of your paycheck, it will be hard to qualify for new lines of credit.

For this reason, student loan borrowers need to closely watch how their monthly payments get reported to the credit bureaus.

Sherpa Tip: Changing repayment plans can help your Debt-to-Income ratio.

If you are on the standard ten-year repayment plan for your federal loans, switching to a repayment plan with a lower monthly payment might make sense.

You can continue making larger payments to eliminate your debt as planned, but a lower monthly bill gets reported to the credit bureaus and improves your DTI.

Don’t Lose Sight of the Big Picture

If we focus too much on credit scores, it is easy to lose sight of more important goals. Just because something is good for your credit score doesn’t mean it is a good idea. Likewise, a decision might hurt your credit score, but it might also be the best choice.

There are two objectives that borrowers should always keep in mind:

• Borrowers Must Eventually Eliminate Their Student Loans – Sometimes people get caught up in the credit age component of their score, so they think it is a good idea to let their student loan linger. This is a mistake. Paying interest to temporarily inflate your credit score is usually a bad idea.
• The Goal of a High Credit Score is to Save Money on Interest – Nobody wants a high credit score for bragging rights. We want a high credit score so that we can qualify for future loans and get a favorable interest rate. Credit scores should be used to save money. Don’t spend money to improve your credit score.

What Student Loan Should I Pay Off First to Help My Credit Score

There isn’t one simple rule for determining the best loan to eliminate for credit score purposes.

Instead, borrowers should consider their current student loans and their future financial goals.

The following loans are all reasonable targets for credit improvements and other financial goals:

• The Largest Monthly Payment – Knocking out the student loan with the largest monthly payment will have the biggest impact on your debt-to-income ratio. If your goal is to buy a house, erasing the largest monthly payment may do the most good.
• The Smallest Loan Balance – If loan elimination is a major challenge and a distant goal, attacking the smallest loan will lead to the fastest result.
• The Newest Loan – Credit age is a factor in credit scores. If you pay off the newest loan first, it preserves older debts and improves your average credit age.
• Private Loans Before Federal – Private student loans are notoriously more difficult to repay than federal loans. Private lenders don’t offer income-driven repayment plans or student loan forgiveness. Because late payments and defaults are major risks to credit scores, eliminating the difficult student loans first can protect your credit score.

Sherpa Tip: Student loan refinancing is often a valuable shortcut for debt elimination.

Refinancing your loans may move your credit score up or down, but by locking in a low interest rate on a long-term loan, you can significantly improve your debt-to-income ratio.

The lenders offering the lowest rates on 20-year loans are listed here.

Student Loans and Credit Scores: Frequently Asked Questions

Over the years, I’ve received a ton of reader questions about credit scores.

The following questions are the ones I receive most often:

The post Student Loans and Your Credit Score: Everything You Need to Know appeared first on The Student Loan Sherpa.

However, avoiding student debt at all costs comes with its own set of concerns.

When paying for college, the ultimate goal should be paying for school in the most responsible way possible. In some cases, federal student loans may play a necessary part.

Don’t Focus on One Year: Think About the Total Cost of Collge

Earning a college degree usually takes four to five years. Don’t make the mistake of taking things one year or even one semester at a time.

Many students have access to college savings accounts like a 529. These resources can be a great tool to help pay for school. However, 529 plans often fall short of paying for the entire cost of college.

The families that will need additional outside help should identify their needs as soon as possible. If all resources are used after three years of school, a student may require significant student loan help for the fourth year.

The danger in waiting until the end for student loan help is the strict federal student loan borrowing limits imposed by the government. Students who need help beyond the federal limits often resort to borrowing private student loans.

Federal student loans are a superior option because of the many borrower protections they provide. These protections include student loan forgiveness and income-driven repayment.

If a student spreads student loan borrowing over four years, they may avoid needing the more risky private student loans.

Federal Subsidized Loans Carry Little Risk

The best student loan available is a federal subsidized student loan. This is because the government pays the interest the loan accrues during school.

Avoiding debt is still the preferred option, but if student loans are required, families should develop a plan to make sure that they maximize the potential benefit of subsidized aid.

Borrowers always have the option of repaying the debt early. There are no prepayment penalties with any federal student loans.

Avoid Desperate Financial Decisions

In an attempt to avoid student loans, some parents choose to raid their 401(k) account to pay for school.

While the motives behind the move are commendable, the decision is almost certainly a mistake.

Early withdrawals from 401(k)s come with huge penalties and tax consequences.

Further, even though borrowing for school isn’t ideal, it is still an option. Borrowing for retirement doesn’t exist. If the money saved for retirement isn’t enough, parents could be in an awful situation. They may even become financially dependant on their children.

Don’t prevent one problem by creating an even more severe problem.

Student Loans are a Bad Way to Build a Credit History

Some people might argue that student loans are useful because they help build up the borrower’s credit history.

This would be a lousy strategy.

Building up your credit history during college is a really smart idea. It may make buying a house in future years significantly easier. However, student loans are the wrong tool for accomplishing this job.

The first problem with this approach is that it is expensive. Outside of federally subsidized loans, the interest generated by student debt can be substantial. The price of the interest is not worth the marginal credit score benefits.

Once student loans are paid off, they fall off the credit report. If you are a responsible borrower and you wisely pay down your student loans, the credit score benefits will disappear with the debt.

Students worried about their credit score should open a no-fee credit card and pay down their balance in full each month. They can keep this card indefinitely, build up a credit profile, and not spend any money on interest.

There may be risks to avoiding student debt, but credit score building is not a concern.

Most Important Thing: Have a Plan to Repay Any Debt

If you fear a student loan nightmare, that is a good thing. Student loans should be a concern because they can be very dangerous.

However, in moderation, they can be a valuable tool to fund an education. Desperately avoiding borrowing student loans comes with its own risks.

The key to proper use of student loans is planning. Have a plan to repay the debt quickly. Have a backup plan if the unexpected happens.

The post Is There a Risk to NOT Borrowing Student Loans? appeared first on The Student Loan Sherpa.

However, student loan refinancing isn’t always the right move. In fact, student loan refinancing is an awful decision for many borrowers. Refinancing the wrong loans could cost thousands of dollars and destroy your credit.

The purpose of this guide is to help borrowers quickly determine whether or not student loan refinancing is the right solution for their personal debt situation.

When is it a Good Idea to Refinance Student Loans?

Deciding when the time is right to refinance will depend on many circumstances. Additionally, whether or not refinancing is a good idea will depend upon the student loans that you have.

Private Student Loans – The decision to refinance is fairly simple. If you can get a better deal — meaning lower monthly payments and/or a better interest rate — refinancing is a good idea.

Federal Student Loans – Federal student loans are more complicated. When a borrower refinances their federal loans, they are converting federal debt into private debt. Borrowers that want to keep the federal perks and protections should probably avoid a refinance.

Important Reminder: Keep in mind that refinancing is not an all-or-nothing process. Borrowers can pick and choose the loans to include in the refinance. Some should choose only to refinance their private loans, while others may choose only to refinance one or two high-interest loans.

When Shouldn’t You Refinance Student Loans?

If you are trying to decide whether or not refinancing is worth it or a mistake, it helps to keep in mind how refinancing works.

The refinance lender pays off your existing loans with funds from a brand new student loan. If the old loan is better than a proposed new loan, you shouldn’t refinance.

Interest rates and monthly payments are the obvious concerns, but there are other factors. Generally speaking, a fixed-rate loan is preferable to a variable-rate loan. Additionally, avoiding a cosigner is preferred. Some borrowers even refinance to remove their cosigners from their student loans.

What is the Downside to Refinancing Student Loans?

The biggest danger of student loan refinancing comes with refinancing federal student loans.

Refinance lenders may be able to offer lower interest rates, but they cannot compete with the federal government’s income-driven repayment plans or student loan forgiveness options.

Further complicating things is the fact that once a student loan has been refinanced, there is no way to “undo” the process. If borrowers suspect that they may need federal protections in the future, it would be a mistake to refinance the federal loans.

Along those same lines, borrowers optimistic about the chances of federal student loan cancellation should not refinance. I don’t think cancellation is a high probability, but avoid refinancing if you want to plan for it.

There are also a few minor downsides that borrowers might wish to avoid:

• Dealing with a new lender – In a refinance, your old loans are paid in full and a new student loan is created. This means working with a new company and its rules.
• Time spent refinancing – Checking rates with just one lender normally takes about 10 minutes. However, borrowers are advised to shop around for the lowest possible rate, so expect to invest at least about an hour to find the best option.
• Higher monthly payments – Some borrowers choose to refinance at the lowest possible interest rate. These rates are only available on 5-year loans. This shorter repayment length often means higher monthly payments. Borrowers concerned about monthly payment amounts should focus on 20-year loans.

Will Refinancing Hurt My Credit Score?

For the vast majority of borrowers, the credit score impact on student loan refinancing is minimal. Some see a slight increase, some see a slight decrease, but the movement is usually small.

Some factors might help your credit score:

• Fewer open lines of credit
• An improved debt-to-income ratio

Other factors may lower credit scores:

• Oldest lines of credit removed from credit report
• The inquiry from the hard-pull to get the loan

Finally, the refinancing process may cause a couple of oddities in your credit report for the first month or two after the process is completed. For this reason, borrowers should avoid refinancing if they are about to apply for a mortgage or other major loan.

What is a Good Interest Rate?

Whether or not student loan refinancing is worth it will depend heavily on the interest rates offered.

Because market conditions change, it is hard to say with certainty what makes a good rate or a bad rate. That being said, any interest rate improvement is usually a good rate. Borrowers always have the option of refinancing a second or third time if even better rates become available.

At present, the best student loan interest rates are available from the following lenders:

Rank	Lender	Lowest Rate	Sherpa Review
T-1		4.86%	ELFI Review
T-1		4.86%*	Splash Financial Review
3		5.29%	Laurel Road Review

Borrowers looking for longer than five years to repay their loans may prefer to focus on the lenders with the best 20-year loan interest rates:

Rank	Lender	Lowest Rate	Sherpa Review
1		6.08%*	Splash Financial Review
2		6.53%	ELFI Review
3		6.55%	Laurel Road Review

Does the Pandemic Change whether or not Student Loan Refinancing is Worth It?

The government has gotten pretty aggressive about helping student loan borrowers get through the pandemic. Most notably, payments have been suspended and interest rates on federally held student loans have been lowered to 0%.

For federal student loan borrowers, this means the right move is to wait to refinance. No lender can compete with a 0% interest rate. Additionally, we are in a time of economic uncertainty. Many Americans have lost their jobs. If you have concerns about employment stability, giving up the federal protections is also probably a mistake.

Private loan borrowers don’t have the same concerns. Private lenders have continued to charge interest throughout the pandemic. If you have the opportunity to get better loan terms, it is still worth doing.

Quick Recap: The Pros and Cons of Refinancing Student Loans

Setting aside the minor headaches and smaller perks, there are two major pros and cons to refinancing student loans.

Pro: Lower interest rates – Eliminating high-interest debt and replacing it with low-interest debt is a huge win for borrowers.

Con: Losing out on Federal Protections – Not all borrowers need the federal perks, but no private lender can compete with the federal protections offered.

Pro: Lower monthly payments – The value of a lower monthly bill comes from the opportunities that it creates. Borrowers can build up an emergency fund, save for retirement, and qualify for a larger mortgage.

Con: Passing a credit check – The borrowers who most need the services of student loan refinancing are the ones who will have the hardest time getting approved.

The borrowers that can qualify for lower monthly payments or a better interest rate without missing federal protections are the ones who will most benefit from student loan refinancing.

Next Steps:

• Check out the Lender Rankings and Reviews.
• Learn which lenders offer the easiest approval.

The post Is Student Loan Refinancing Worth It? appeared first on The Student Loan Sherpa.

The good news for borrowers is that the credit score drop from paying off a student loan is usually short-lived.

The other bit of positive news is that the credit rating consequences are minimal or non-existent for the vast majority of borrowers.

Why Do Credit Scores Fall After Student Loans are Paid Off?

One of the factors in a credit score is the age of credit. People with a long credit history are viewed as less of a risk than people with a short credit profile.

Credit bureaus remove student loans from credit reports once the loan is paid in full. For some borrowers, it reduces the age of their oldest line of credit. For others, it reduces the average age of credit.

It is ridiculous that paying off debt can hurt a credit score, but that is the reality. However, it is worth noting that if there is a credit score drop, the change will be small or insignificant for the vast majority of borrowers. Paying off a loan isn’t nearly as bad as missing a payment or having debt in collections.

When Should My Credit Score Go Back Up?

The credit score improvement typically takes very little time.

In most cases, a borrower’s score will return to normal within a few months.

A longer recovery time is possible for borrowers in more extreme circumstances. For example, suppose a borrower only has a single student loan on their credit report. As a person without any credit card, auto, or any other debt, they may see a larger drop and more extended recovery time.

Fixing this Issue

Ideally, creditors and credit reporting agencies should stop penalizing consumers for repaying debt. If anything, repaying a full student loan balance should help a credit score. If the businesses involved don’t act, it might make sense for the government to intervene. There is already talk of the Biden Administration taking steps to change how credit data is reported.

Individual borrowers can’t afford to wait for broader change. Unfortunately, they have very little control over the drop in score.

The important thing for borrowers is to keep older lines of credit open. If you have an older credit card, try to keep that account active. If the credit card company charges a yearly fee, consider asking to switch the account to a no-fee option. Most credit card companies can make this change without closing the card and opening a new one.

Ultimately, the final student loan payment is unavoidable, and borrowers may see their credit score go down.

Should I Delay Paying Off My Student Loan so that My Credit Score Doesn’t Go Down?

In most cases, it won’t make sense to let a student loan linger just to prop up a credit score.

For most consumers, the value of a high credit score comes from the fact that it enables them to get better interest rates in future borrowing. The idea is that a high credit score translates to saving money on debt interest.

Prolonging student loan repayment means spending extra on interest. Spending more money on actual interest now so that hypothetical interest rates in the future might be lower doesn’t make sense.

The one exception would be for people that are applying for a mortgage soon. This particular mortgage issue is quite complicated. Keeping the loan alive may be beneficial to your credit score. However, paying off is arguably a better decision because it improves your debt-to-income ratio (DTI).

This is a situation where talking to a mortgage lender is ideal. In the best-case scenario, the student loan credit score dip hasn’t happened yet, but the debt isn’t included in DTI calculations. Final student loan payments and potential credit score drops are one of many student loan issues that borrowers should consider before applying for a mortgage.

The post The Reason Your Credit Score Went Down After Your Last Student Loan Payment appeared first on The Student Loan Sherpa.

Whether refinancing is good or bad for your credit score isn’t random chance or luck. Instead, it is a predictable change. This article will focus on the different factors that can move scores up and down.

Finally, for refinancing to be a net positive, borrowers need to avoid the one big mistake that can damage credit scores.

Credit Age: One way a student loan refinance can hurt credit scores.

Length of credit history is a significant factor in credit scores.

According to credit bureau Experian, credit history length is the third most important factor in a credit score. Experian claims that credit age makes up 15% of your total score.

A refinance can hurt your credit history length if the oldest item on your credit report is a student loan. Because refinancing pays off old student loans and replaces them with a new loan, borrowers erase old items from their credit reports.

If a borrower has student loans that are ten years old, but no other lines of credit, a refinance could hurt their score considerably. People who have credit cards or other debts that are approximately the same age as their student loans will not be impacted.

Sherpa Tip: Focus on the big picture. If you are about to buy a house and your oldest credit report items are student loans, refinancing could be a mistake.

However, keep in mind that the loan will eventually be paid in full and fall off your report. Borrowers must decide if they are willing to spend extra on student loan interest for the short-term preservation of their credit score.

The Big Help: Debt-to-income ratio changes

The debt-to-income ratio or DTI is a huge factor in any credit decision.

If you have ever been declined for credit due to insufficient income relative to your debt, it was a DTI issue.

Refinancing can replace many student loan payments with a single student loan payment. If that single student loan payment is smaller than the total student loan payments that it replaces, your DTI will improve.

A change in debt-to-income ratio can mean the difference between an approval and a denial on future credit applications. A better DTI will also allow borrowers to qualify for a larger mortgage when they buy a home.

The Little Harm: The Credit Inquiry

An unavoidable part of the student loan refinance process is the credit check.

Lenders require a hard inquiry which can negatively affect your credit score.

Most consumers will lose less than five points on average from a credit check. However, the exact amount of the drop can vary from one person to the next.

The good news is that the harm to your credit score is short-lived. As the inquiry ages, it has a reduced influence on the score. After a year, it doesn’t impact FICO scores at all. After two years, it isn’t even reported.

The Mistake to Avoid: Too Many Credit Checks

Most consumers know that shopping around to find the best deal is smart.

The importance of shopping around is especially true when it comes to student loan refinancing. The rates advertised by lenders and the rates actually offered by lenders can be very different. Additionally, each lender uses its own unique formula for deciding the refinance applications to approve and the rates to offer.

As a result, shopping around is essential for borrowers looking for the lowest possible refinance rate.

The good news for borrowers is that the credit bureaus will usually count multiple credit checks as one single inquiry. As long as the shopping around takes place within a 45-day window, it will count as a single inquiry on a credit report. However, some older versions of the FICO formula use a more limited 14-day window, so it is best to do all of your rate shopping in two weeks or less.

Spreading out refinance shopping over several months is an easily avoidable mistake. Put together a list of student loan refinance lenders, and complete all of your applications quickly. Each application takes about 10 minutes. Most borrowers can find the best rate on the market in less than an hour work.

Is Student Loan Refinancing Worth the Credit Risk?

Refinancing will cause some credit scores to go up and others to go down. For those that go down, the impact usually is minimal and short-term.

However, all borrowers should know that refinancing does put your credit score at risk.

For most borrowers, the decision comes down to opportunities. A good credit score by itself is worthless. However, having a good credit score can open many doors.

If you are buying a house soon, it might not be worth the risk to your credit score.

In most other cases, it is probably worth the small gamble. For many borrowers, their student loan debt is their largest debt and biggest financial headache. Refinancing can save thousands of dollars over the life of the loan.

The larger your loan balance and the higher your interest rate, the more worthwhile it will be to refinance.

Next Steps:

• Check Your Credit Score – All Americans can check their credit scores yearly on annualcreditreport.com. This credit check is free of charge and does not impact your credit score.
• Have a Plan to Refinance – A bit of research ahead of time can make it easy to stay under the 14-day shopping window. This site keeps a list of national refinance lenders and also tracks the lenders advertising the lowest refinance rates.

The post Does a Student Loan Refinance Help or Hurt My Credit Score? appeared first on The Student Loan Sherpa.

Unfortunately, I came across an article this week about a football player who was still repaying student debt. With the minimum salary in the NFL just under half a million dollars per year, I thought it was interesting that such a well-compensated athlete would still be carrying student loans.

The answer, according to ESPN, was very disappointing:

“Unlike many, he could have erased his debt quickly. But, after having no credit cards in college and living at home the final three years of school, he saw spacing out his loan payments as a way to build credit.”

This “hack” has been floating around for a while and it is a terrible suggestion.

Is Not Paying Off Student Debt is a Way to Improve a Credit Score?

Like many myths, this particular tip does have a basis in truth.

Not paying off a student loan in full can potentially carry some credit score benefits. For borrowers, such as the cornerback in the ESPN story, a student loan may be the oldest open line of credit on a credit report. By paying off the student loan, the oldest line of credit will fall off the credit report and the score will potentially drop by a few points.

If credit score was a competition to see who had the best, this would be a sensible approach.

The reason this approach is a bad idea is that it ignores the two reasons we care about our credit score.

Why does a credit score matter?

1. 1. Bad scores can hurt job applications, rental applications, and insurance rates.
   2. A good score helps us save money on interest by qualifying for a lower interest rate.
   3. A good score helps us qualify for future lines of credit.

Many people make the assumption that because a credit score is important, each point on the credit score must likewise be important. This focus and drive to improve a credit score can be extremely useful, but it becomes dangerous at the point consumers lose sight of the reason that credit scores matter.

Why Spend Extra Money on Student Loan Interest?

For most consumers, a few credit score points in one direction or the other will not make a difference. Those with good credit can afford to drop a few points without it hurting future financial goals, and those with bad credit won’t suddenly have a good credit score if they choose not to pay off their student loans.

Ultimately, the decision for most comes down to a very simple question: would you rather save money on interest right now, or do you think having a few extra points on your credit score will make a difference?

The purpose behind chasing a good credit score is that it helps save money on interest on future large purchases. Given the minimal movement in score caused by paying off a loan, opting for the certainty of saving money right now seems smart.

Don’t Forget that Paying off Debt can Help

Most creditors look at two critical numbers when evaluating applications: credit score and debt-to-income ratio.

While the credit score may take a temporary dip when a loan is paid off, the debt-to-income ratio will certainly improve. A consumer’s debt-to-income ratio is the ratio of monthly income compared to monthly payments on their existing debt. Creditors will often deny applicants who have large monthly bills compared to what they earn. Borrowers who pay back a student loan in full will improve their debt-to-income ratio once the debt falls off the credit report.

The Exception(s) to the Rule

In most cases delaying repayment in full of a student loan in order to avoid a drop in credit score is a mistake.

However, there are a couple of circumstances where this rule might not apply.

Borrowers who are buying a house and working with a mortgage company will want to carefully discuss their strategy before moving forward. On one hand, a slight drop in credit score might be an issue. On the other hand, a debt-to-income ratio improvement could mean more purchasing power. This is a question that must be answered based upon individual circumstances and an outside expert who is already familiar with your credit profile could be the best source for advice.

Another circumstance where delaying full repayment of a student loan might make sense is for borrowers who are on the fence between financial options. Suppose a borrower is debating paying off the last $5,000 of a student loan or putting $5,000 in a retirement account. On a high-interest student loan, paying off the loan is almost always the smart choice. If the student loan has a low interest rate, opting to save for retirement is probably the smart move. When the interest rate is in the middle ground it can be a more difficult decision. Borrowers in this category could use the potential credit score consequences as a tie-breaker.

Credit Age Strategy

Many student loan borrowers have credit cards that are as old or older than their oldest student loan. These borrowers really don’t need to be as concerned about any potential credit score damage from paying off a student loan.

The borrowers who do need to be concerned are those who only have a student loan on their credit report. The best thing they can do for their credit score is to open a no-fee credit card as soon as possible. Whether repayment is delayed or not, the loan will eventually get paid in full. By opening a credit card account, a borrower can establish revolving credit and positive payment history. The credit card does not need to carry a balance, it just needs to be an open account with payments made on time.

A Bird in Hand is Worth Two in the Bush

Other than a couple of exceptions that have already been mentioned, it really doesn’t make sense to let a student loan linger just for the credit score benefits.

Ultimately, most people will be better off eliminating debt now and saving money on interest now. Spending extra money in the hopes that it might improve your credit score is a fool’s errand.

Take the immediate and guaranteed savings rather than hoping for a future payoff.

The post This Student Loan “Hack” is a Terrible Way to Improve Your Credit Score appeared first on The Student Loan Sherpa.

Despite the significant differences between federal direct consolidation and private student loan refinancing, their impact on a borrower’s credit score are usually similar.

In this discussion, we’ll explore the factors that can lead to an increase in credit scores and the situations in which a credit score might decline. We’ll also cover why credit score changes shouldn’t worry most borrowers or influence their decision-making too heavily.

How does loan consolidation improve my credit score?

When consolidating student loans, several aspects of a borrower’s credit profile changes. According to the credit bureaus, most of these changes improve a borrower’s creditworthiness.

One factor that determines credit score is the number of open lines of credit. Having too many can lower your score. Consolidation replaces multiple student loans with a single new loan. So, although you’ve maintained the same amount of debt, you have reduced your total number of credit lines. This can lead to a higher credit score.

Another way in which student loan refinancing benefits your credit score is that many loans will show up on your credit report as “paid in full”. Unsurprisingly, credit bureaus view a history of fully repaid debt as a positive. Depending upon how the loans are consolidated, your credit report could read that the loans were refinanced, or it could just say that they were paid in full. Either way, your credit score will likely receive a boost.

One final advantage of consolidating your student loans is that it can often lower your monthly payments. Lower monthly payments improve your debt-to-income ratio. This ratio is a key factor lenders consider when deciding whether to loan you money. If you’re looking to buy a home, improving your debt-to-income ratio can be crucial to achieving that goal.

Can Refinancing or Consolidation Cause a Credit Score to Drop?

While it would be ideal for consolidation or refinancing to lead to a predictable change in credit scores, the reality is that outcomes can vary widely.

In some circumstances, a borrower’s credit score can decrease.

The main explanation for a drop in credit score is due to the age of credit. A longer credit history tends to boost credit scores. However, consolidating or refinancing results in old loans being paid and marked as closed. This could negatively impact borrowers with a limited credit history outside of their student loans. Closing old student loan accounts in favor of a new consolidated or refinanced loan can significantly reduce the average age of your credit accounts, potentially lowering your credit score.

Although it is generally a minor factor, checking interest rates for consolidation or refinancing can cause a temporary dip in your credit score. Credit bureaus may view numerous credit inquiries as a signal that a borrower is experiencing a financial distress, making the borrower appear to be a higher credit risk. However, credit bureaus typically bundle inquiries from rate shopping within a short timeframe as a single inquiry, minimizing the impact. So, borrowers are still encouraged to check rates with many lenders in order to get the best deal.

Ultimately, most borrowers will likely see a small increase in their credit score following consolidation or refinancing. Yet, as some readers have experienced, there is also the possibility for a credit score drop.

Nevertheless, changes in credit score shouldn’t be a major concern when considering consolidation or refinancing, as the benefits of these actions often outweigh the temporary fluctuations in credit scores.

Most People Shouldn’t Worry About Their Credit Score when Refinancing

The desire to improve and protect a credit score is responsible, but it shouldn’t be the primary concern.

A high credit score’s real value lies in the ability to secure favorable lending terms. In other words, the value of a good credit score is the chance to save money.

The main goal of consolidating or refinancing student loans is precisely that – to save money. If your credit score is already sufficient to secure a low interest rate or advantageous repayment terms, then it has served its essential purpose.

Refinancing or consolidation has the potential to save you hundreds of dollars per month and thousands of dollars per year. With that much money at stake, worrying about what Equifax or TransUnion thinks might not be the best use of your time and energy.

However, an exception exists for those planning to buy a home soon. Even a fractional difference in mortgage interest rates can have a substantial financial impact over time. If you’re in this situation, it’s prudent to consult with a lender or mortgage broker before making any moves that could affect your credit score. These housing finance professionals can advise on the wisest course of action, helping you balance the benefits of loan refinancing or consolidation with the necessity of maintaining a good credit score for a home purchase.

The Bottom Line

Most borrowers should see a slight improvement in their credit score after refinancing or consolidating their student loans. However, it’s important to recognize that, for some, credit scores could temporarily decrease.

What’s crucial is the financial outcome of refinancing or consolidating. If these actions lead to cost savings, a temporary fluctuation in your credit score should be of minor concern. The primary goal is to enhance your financial situation; if achieving this goal results in a minor and temporary dip in your credit score, it’s generally worth the trade-off.

Have you consolidated your student loans? What tips or advice would you offer? Please leave your thoughts in the comments section.

The post Student Loan Consolidation and Refinancing: Is it Good or Bad for my Credit Score? appeared first on The Student Loan Sherpa.

The most popular plans are Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE).

What makes these plans special is that your monthly payment is based upon what you can afford to pay rather than what you owe. As a result, most student loan borrowers can qualify for lower payments.

Will signing up for IBR, PAYE, or REPAYE hurt my credit score?

Many consumers already know that enrolling in a payment plan to settle debt can hurt your credit score. This usually happens when a lender reports to the credit agencies that the borrower is “paying partial payment agreement” or that the debt “settled.” These terms can be red flags for future creditors.

Signing up for an income-driven plan is different. Even though some of the IDR plans require a “partial financial hardship,” there is no hardship or partial payment designation on your credit report. In fact, the “partial financial hardship” required for some IDR plans simply means that signing up for the plan would save you money over the standard repayment plan.

Because there is not a negative designation associated with signing up for IBR, PAYE, and REPAYE, there should be no harm to your credit score.

However, as noted in the comments section below, there can be some negative consequences to signing up for one of the Income-Driven Repayment plans.

Will signing up for an income-based repayment plan help my credit score?

Signing up for IBR, PAYE, or REPAYE is a powerful option because it can free up money each month and get you started on the path towards student loan forgiveness. Unfortunately, the direct impact on your credit score is minimal.

This is because your monthly payment is altered. Your credit history remains the same. Signing up for an income-driven repayment plan will not erase past mistakes.

However, signing up for an income-driven repayment plan can have a couple of indirect benefits to your credit overall.

How can income-driven repayment help my credit?

For those looking to build good credit to buy a house or qualify for lower interest rates in the future, signing up for IBR, PAYE, or REPAYE can be very helpful in two ways.

1. IDR plans help your debt-to-income ratio – Even though the direct impact on your credit score may be minimal, an income-driven repayment plan can dramatically improve your debt-to-income ratio (DTI). Your DTI compares your monthly bills as reported on your credit report to your monthly income. The more income you have compared to your debt, the better your odds of getting an approval are. By reducing your monthly obligation on your credit report, lenders will see that you are in a better position to afford a mortgage or car payment.
2. IDR plans help avoid missed payments – Repaying student loans on the standard repayment plan can be very difficult for many borrowers. If you are barely getting by on your current student loan plan, you could be one illness away from a missed or late payment. Signing up for income-based repayment can allow a borrower to start saving an emergency fund to ensure that there are no payment issues in the future. Put simply, lower payments mean more flexibility and financial stability. A missed or late payment can have a devastating impact on your credit score. Finding a way to prevent this from happening is a major win.

Some borrowers also choose to consolidate their federal student loans as they begin repayment. Consolidation of student loans is another avenue that can potentially help credit scores.

What are the Possible Negative Consequences to IDR Enrollment?

Some borrowers who sign up for an Income-Driven Repayment plan can qualify for monthly payments of $0 based upon their income. These zero-dollar payments count towards student loan forgiveness and can be really helpful for a borrower who is unemployed or underemployed.

The downside to zero dollar payments is that loan balances will go up because the loan continues to accrue interest. Borrowers in this situation should understand the events that trigger interest capitalization and avoid them when possible.

The credit score consequences of an increasing balance without missing a payment are a matter of some debate. Credit bureau Experian appears to argue that not making payments will not directly hurt your credit score as long as it is authorized by the lender. Lender Sallie Mae says that the increasing balance could have an impact on your credit score, depending upon how the information is reported. Several readers have also stated that the increasing balance has caused their credit score to drop.

At this point, it is worth noting that IDR enrollment by itself does not have a negative credit consequence. The borrowers who have monthly payments that are less than the monthly interest accruing on the loan are the ones reporting an issue. Borrowers in this situation are permitted to make payments larger than the monthly interest accumulation if they are concerned about their credit score being hurt.

The other conceivable downside for a borrower who qualifies for $0 monthly payments comes when applying for a mortgage or other loan. When a credit agency sees $0 for the monthly payment, they will often substitute 1% of the loan balance as the monthly payment for Debt-to-Income ratio calculations. In the past, the 1% figure was used for most mortgage applications, but recent changes to mortgage underwriting changed this rule. Borrowers with $0 payments will still get hit with the 1% rule, but most other borrowers will have their actual monthly IDR payment used.

Bottom Line

Signing up for Income-Based Repayment, Pay As You Earn or Revised Pay As You Earn may not directly help or hurt your credit score. However, the indirect benefits can be large, and going the income-driven repayment route can have a positive impact on your ability to get credit.

Many borrowers consider an income-driven repayment plan because they are unable to make the full payments on the standard repayment plan.

If a late payment is a serious risk due to unaffordable large bills, switching to Income-driven repayment should be an easy decision. The credit score implications of signing up for IBR, PAYE, and REPAYE are relatively small compared to the devastating consequences of late payments, delinquencies, and defaults.

The post Will Signing Up For IBR, PAYE or REPAYE Help My Credit Score? appeared first on The Student Loan Sherpa.