Student Loans & Your Credit

Student Loans & Your Credit

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated August 5, 2022

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 $28,000, 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? 

Let’s dig deeper into student loans and how they may impact your credit. 

Can Student Loans Affect Your Credit Scores?  

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 it.

The Effect Of Student Loans On Your Credit Scores 

Having a loan is one of the most effective ways to build and improve your credit scores. But if you mismanage your loan, your scores could take a hit. Let’s take a look at some of the more common ways a student loan could negatively impact your credit:

Missed Student Loan Payments 

Your payment history usually plays the biggest role in your credit score calculation. 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 stop making payments for an extended period of time, usually after 270 days. Your credit report will reflect the default, and your credit score will likely suffer as a result.

Student Loan Sent To Collections

Once your student loan is in default, your account will 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 – 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, you can use your student loan to help you establish healthy credit by doing the following:

Build A Solid 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. As with any other type of loan, your student loan could positively affect your payment history, as long as you’re responsible with your payments. 

Establish Your Credit History

Your credit history refers to the average age of your credit accounts and how long they’ve been active and used. This factor typically accounts for 15% of your credit scores. By taking out a student loan, you’ll be creating an account that’ll increase the age of your credit accounts the longer it’s open. Generally, the higher the average age of your accounts, the more it may positively impact your scores. 

Can Credit Scores Affect Your Ability To Get A Student Loan? 

Whether or not your credit score impacts your ability to secure a student loan depends on if you’re applying through the government or a private lender:

Government Student Loans 

Student loans offered by the government usually don’t require a credit check, which means you may still be able to get approved even if you have bad credit or no credit at all. Plus, these loans come with a fixed interest rate, so you wouldn’t be able to secure a lower rate even with an excellent credit score. 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?

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 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 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. 

With these types of private student loans, you’ll 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 Is The Average Student Loan Debt In Canada? 

According to Statistics Canada, the average student debt in 2015 (the latest numbers available) are as follows:

Government Sourced Non-Government Sourced 
College  $14,200$12,000
Bachelors$23,000$21,000
Masters$20,000$25,000
Doctorate$26,000$27,000

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 on your monthly payments. In some extreme cases, your loan forgiveness may be forgiven however it is rare and requires additional documentation. Plus, you won’t be eligible for this program if you’re already over 90 days overdue on your loan payments.

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, then to the principal. 

But if you’re still in school or are within the 6-month non-repayment period, the lump-sum payment will go toward 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.

Student Loans And Credit FAQs

Do government student loans affect credit scores?

Government student loans can affect your credit score either negatively or positively, depending on how you manage your loan. For instance, making timely payments will improve your credit score, but missing payments will do the opposite.

Can I have my student loan forgiven?

If you took out a provincial or federal student loan, you may be eligible for the Repayment Assistance Plan (RAP), which allows the government to share the cost of a loan with you. In turn, you’ll just have to repay what you can afford. For the most part, this program will help you reduce your payments. Keep in mind that you may also be able to skip payments during a 6-month grace period.  The RAP doesn’t technically forgive your student loan, but there are some other loan forgiveness programs available in Canada. Such as individual provincial student loan forgiveness programs, bankruptcy forgiveness, or student loan forgiveness for doctors and nurses.

Does refinancing your student loan hurt your credit?

A student loan refinance will have a minimal effect on your credit score, but it could cause it to dip temporarily. That’s because the lender will run a hard credit check on you. But your score will only be impacted for a brief period of time, and the money you could potentially save through a refinance might make it worth it.

What if there’s a mistake on my credit report about my student loan?

Mistakes on your credit report could unfairly pull your credit score down. If you notice any errors on your report, have them investigated and fixed right away. 

Final Thoughts

Student loans are often a necessity if you want to attend college or university. But in addition to helping you cover your tuition fees, your student loan may also jumpstart your post-grad like by helping you build good credit; as long as you’re responsible with your payments.   


Rating of 4/5 based on 5 votes.

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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