Do Deferred Student Loans Affect Your Credit Score?

A common concern revolves around how such deferments might influence one’s credit score. This article aims to clarify the relationship between deferred student loans and credit scores, offering insights into how this temporary payment pause interacts with the factors that determine creditworthiness.

Understanding Student Loan Deferment

Student loan deferment allows borrowers to temporarily postpone payments. During an approved deferment period, payments are not required, and the loan account is reported to credit bureaus as a “deferred” status. This temporary relief can be beneficial during periods of financial strain, such as unemployment or enrollment in higher education. The loan remains an active account on the borrower’s credit report.

Components of a Credit Score

Credit scores, such as the FICO Score, are calculated based on five factors, each weighted differently. Payment history carries the most weight, accounting for approximately 35% of a credit score. It reflects an individual’s track record of making timely payments on all credit accounts. Consistent on-time payments are crucial for building a positive credit profile.

The amount owed, also known as credit utilization for revolving accounts, is another factor, making up about 30% of the score. This considers the total debt an individual carries and how much of their available credit is being used. A lower credit utilization ratio, generally below 30%, is viewed favorably by lenders.

The length of credit history contributes around 15% to the score. This factor assesses the age of the oldest account, the newest account, and the average age of all accounts, with longer histories indicating experience managing credit.

The types of credit used, or credit mix, account for about 10% of the score. This refers to the diversity of credit accounts managed, such as installment loans (like student loans) and revolving credit (like credit cards). Demonstrating responsible management of various credit types can positively influence this component.

New credit makes up roughly 10% of the score. This factor considers recent applications and newly opened accounts, as multiple inquiries in a short period can indicate higher risk.

How Deferment Affects Your Credit Score

Deferred student loans interact with these credit score components, generally without negative consequences if managed properly. Regarding payment history, since payments are not required during an approved deferment, the absence of payments does not negatively impact this factor. The loan is reported as current or deferred, avoiding late payment marks that could reduce a credit score.

The “amounts owed” category can be influenced by deferment due to interest accrual. For many student loans, especially unsubsidized federal loans and most private loans, interest continues to accumulate during the deferment. If this accrued interest is not paid, it may be capitalized, added to the principal balance at the end of the deferment. This increases the total loan balance and raises the reported debt.
While student loans are installment loans and do not directly affect credit utilization like revolving credit, an increased balance can still impact the “amounts owed” category, which considers the total debt.

The length of credit history benefits from deferment. The student loan account continues to age during the deferment, contributing positively to the average age of credit accounts. A longer credit history indicates a established borrowing pattern, which can be favorable for credit scores.

A deferred student loan continues to be part of an individual’s credit mix. This maintains diversity of credit types on the report, which is advantageous if revolving credit accounts are managed.

New credit applications are not directly affected by deferment. However, any applications made during a deferment result in a hard inquiry on the credit report, which can cause a temporary dip in the score. The deferment status of the student loan does not prevent these standard impacts from new credit inquiries. Deferment is not considered a negative event for credit scores, but understanding interest accrual and impact on the loan balance is important.

Checking Your Credit While Deferred

Even when student loans are in deferment, regularly monitoring credit reports remains an important financial practice. It is important to confirm that the deferred student loan is accurately reported by the loan servicer and the credit bureaus. Borrowers should look for the loan status to be listed as “deferred” or “current,” rather than “late” or “delinquent,” to ensure proper reporting.

Individuals can obtain a free copy of their credit report from each of the three major nationwide credit bureaus—Equifax, Experian, and TransUnion—by visiting AnnualCreditReport.com. Federal law entitles consumers to one free report from each bureau every 12 months, and this access has been expanded to weekly free online reports. Checking these reports allows individuals to review their account information, payment history, and debt levels for accuracy and to identify any discrepancies that may need to be disputed.