Given the sky-high cost of post-secondary education, many students rely on loans to help cover their tuition.
In fact, according to a study by Statistics Canada, one in two post-secondary graduates in Canada had student debt. The average student debt owed (financed by the government and private lenders) by post-graduates increased with their level of study. For example, bachelor’s graduates owed on average $30,600, while those who completed their Doctorate owed $33,000.
But as much as student loans may help you pay for college or university, how will they affect your credit scores?
Key Points
- Student loans can have a positive and/or negative effect on your credit scores. It all depends on how you manage your student loan repayment.
- Making timely payments on your student loan can help improve your credit score, but missing payments can have the opposite effect.
Do Student Loans Affect Your Credit Score?
Yes, your student loan can impact your credit scores, both positively and negatively. But whether it impacts it in a good or bad way depends on how you manage your loan repayments.
| Will Applying For A Student Loan Affect My Credit? Government student loans don’t require a credit check, so applying for one will not affect your credit. Private student loans, on the other hand, usually require a hard credit check which can impact your credit score. |
The Effect Of Student Loans On Your Credit Scores
Let’s take a look at some of the more common ways a student loan could impact your credit:
Student Loan Payments
Your payment history usually plays the biggest role in your credit score calculation.
- On-Time Payments – Making timely payments can have a positive impact on your credit score.
- Missed Payments – If you miss a loan payment, it can negatively impact your credit. Loan payments that are more than 30 days overdue (depending on the lender) are often reported to the credit bureaus and noted on your credit report. When this happens, your credit score will likely dip.
Defaulting On Your Student Loan
Your student loan will eventually be considered in default if you st
op making payments for an extended period of time. That time frame depends on whether your student loan is government-backed or private:
Defaulting On Government Student Loans: Your government student loan will usually be considered in default after 270 days of no payment. Your credit report will reflect the default, and your credit score will likely suffer as a result.
Defaulting On Private Student Loans: With private student loans, it’s at the lender’s discretion regarding how long after a missed payment the loan will be considered in default. For instance, one lender may consider the loan in default and send it to a collection agency after just one late payment, while another may allow up to six late payments to go by before the loan is considered in default. It really depends on the lender and how you communicate with them.
Student Loan Sent To Collections
Once your student loan is in default, your account may be charged off and eventually sent to a collection agency to make up for the funds still owed. Even if you manage to pay off the outstanding balance, your credit report will record the delinquent account, which will remain on your report for up to 6 to 7 years.
During that time, you’ll receive an R9 crediting rating and your credit scores may decline. This, in turn, may make it difficult for you to secure any loan or credit products in the future.
Can Student Loans Help Build Your Credit Scores?
Yes, a student loan can help you establish healthy credit in several ways:
- Payment History: As mentioned, your payment history can play a key role in your credit score. If you make timely payments toward your student loan each billing cycle, you’ll build a positive payment history, which may help you improve your credit.
- Credit Mix: Having a mix of different credit types (ie. student loans, credit cards, car loans, etc) can have a positive impact on your credit score.
- Credit Age: The longer you maintain and manage your student loans, the more it contributes to the length of your credit history, which is helpful for building a good credit score.
Can Your Credit Score Affect Your Ability To Get A Student Loan?
Whether your credit score impacts your ability to secure a student loan depends on whether you’re applying for a government or private loan:
Government Student Loans
Student loans offered by the government usually don’t require a credit check. That means you may still be able to get approved even if you have bad credit or no credit at all. The only time you need to provide a credit check with government student loans is if you are a mature student, which is defined as anyone over the age of 22 years old.
In general, rather than focusing on your credit score, government loan program approval is more heavily influenced by your income or your parent’s income. These loans are typically offered to those in the lower income bracket. So, if you or your parents earn less than the specified threshold, you may qualify.
Private Student Loans
Unlike government student loans, private student loans are typically approved based on your credit and overall financial health. You may have a tougher time getting approved if your credit score is on the lower end of the spectrum, or is non-existent. In this case, you may need the help of a co-signer, such as your parents, to help secure a private student loan.
A higher credit score will increase your chances of loan approval. It may also help you secure a lower interest rate, which will make your student loan more affordable.
How Is Your Credit Score Calculated?
There are five common factors used to calculate your credit scores:
If you are interested in understanding how your student loans can affect your ability to borrow, you need to understand how a credit score works. In general, there are 5 common factors used to calculate your credit scores.
- Approximately 35 percent is based on the consumer’s payment history. This is based on whether individual has been making their debt payments on time.
- Approximately 30 percent is based on your debt-to-credit ratio, which refers to your credit usage versus your credit limit. Generally, a ratio of 30% is recommended, anything higher could negatively impact your credit.
- Approximately 15 percent is based on the length of the consumer’s credit history. This is used in assessing someone’s desirability as a borrower because a lengthier credit history makes it more reliable as a source of insight into the consumer’s behaviour when it comes to financial products. As such, the longer you’ve had your credit accounts open and active, the better it is for your credit.
- Approximately 10 percent is based on your public records. This section includes bankruptcies, liens, and even accounts in collections.
- Approximately 10 percent is based on the number of “hard” credit inquiries in your credit report. Too many “hard” credit inquiries is not great because it suggests that the consumer might have encountered financial difficulties.
When Do You Need To Pay Off Your Student Loan?
When your student loan is due for repayment depends on whether you took out a government loan or a private loan.
When Do You Need To Pay Off Your Government Student Loan?
While you will eventually need to repay your government student loan, you usually don’t have to start repaying it until you’re done with school. Most federal and provincial student loans allow a grace period of 6 months following graduation before you need to start paying it back. That said, interest may accrue during this time.
What Happens If You Miss A Payment On Your Government-Backed Student Loan?
It’s important to understand that if your payments are overdue by at least 270 days, your student loan will be in default and transferred to the Canada Revenue Agency (CRA) for collections. If this happens, you’ll be charged penalty fees, your credit score will suffer, and the CRA may withhold your income tax refunds. In some cases, your wages could even be garnished or assets seized.
When Do You Need To Pay Off Your Private Student Loan?
Rather than applying for a government student loan, you also have the option to apply for a student loan from a private lender. This can be helpful if the funds provided by the Canadian government aren’t enough to cover all tuition fees.
If you take out a private student loan, you’ll be bound to stringent repayment requirements in comparison to government-backed loans.
For instance, most government student loans don’t need to be repaid until 6 months after graduation. Typically, this means payments are not needed while you’re still in school. On the other hand, some private student loans may require monthly payments to be made before you graduate.
That said, there are some private lenders that offer students a grace period following graduation before loan repayments begin. This can be anywhere from 6 to 12 months, on average, depending on the lender. In this case, you’ll still need to make monthly interest-only payments toward your student loan instead of the principal.
The advantage of this arrangement is that the initial payments are lower since you don’t have to make payments on the entire loan amount. But once the interest-only period ends, you’ll start paying both principal and interest for the remainder of the term.
What Happens If You Miss A Payment On Your Private Student Loan?
Like any other type of loan, you could face various consequences if you miss your private student loan payments. These can include penalty fees and a hit to your credit score.
What Is The Average Student Loan Debt In Canada?
According to Statistics Canada, the average student debt in Canada (as of 2020, the latest numbers available) is as follows:
| Government Sourced | Non-Government Sourced | |
| College | $14,900 | $14,700 |
| Bachelors | $24,000 | $27,900 |
| Masters | $24,600 | $30,500 |
| Doctorate | $32,300 | $29,800 |
Tips On Managing Your Student Loans
Keep the following tips in mind to avoid missing payments and pay your student loan off faster:
Apply for Government Assistance
If you think you’re going to run into trouble keeping up with your student loan payments, make every effort to nip the problem in the bud before you find yourself in default. Canada’s National Student Loan Services Center (NSLSC) offers a few programs that can provide you with some financial relief.
For instance, you could qualify for a reduction in interest or a reduction in your monthly payments. In some extreme cases, your loan forgiveness may be forgiven, however it is rare and requires additional documentation.
Make A Lump-Sum Payment
Making a lump-sum payment can help you pay down your loan faster and save you some money in interest over the life of the loan. These payments will first go toward the interest portion, and then to the principal.
Increase Your Payment Amounts
If you can manage it financially, consider making higher payments each billing cycle. This will reduce the total loan amount owed, and in turn, it will lower the interest amount you’ll have to pay.
Create A Budget
Track your income and expenses to ensure you can meet your loan payments. Knowing where your money is being spent helps you prioritize where your money goes and reduce unnecessary spending.
Set Up Automatic Payments
Setting up automatic payments ensures you never miss a payment. Some lenders may even offer a discount for enrolling in auto-pay.
How to Protect Your Credit Score If You Can’t Repay Your Student Loan
If you can’t repay your student loan, you may be at risk of defaulting on your loan. This can negatively affect your credit score.
Fortunately, there are several loan forgiveness programs available in Canada that can help you with your debt while protecting your credit score, such as:
- Provincial student loan forgiveness programs
- Bankruptcy forgiveness
- Student loan forgiveness for doctors and nurses
You may be eligible for the Repayment Assistance Plan (RAP) if you took out a provincial or federal student loan. This program allows the government to share the cost of a loan with you. In turn, you’ll just have to repay what you can afford.
Keep in mind that the RAP doesn’t technically forgive your student loan, but simply helps you financially. For the most part, this program will help you reduce your payments. You may also be able to skip payments during a 6-month grace period.
Final Thoughts
Student loans are often a necessity if you want to attend college or university but don’t have the financial means to cover the cost on your own. But in addition to helping you cover your tuition fees, your student loan may also jumpstart your post-grad life by helping you build good credit, as long as you’re responsible with your payments.
