Student loans affect your creditSchool can have a lifelong impact in more ways than you think. If you’ve taken out student loans, then your credit scores, essentially your credit reports’ final grades, will be affected. While credit scores sound intense, they can easily be maintained with responsible use of credit, such as making payments on time and not overspending on a credit card. Keeping a close eye on your student loans and how they affect your credit reports and scores is also key. To help you out, here’s everything you need to know about student loans and credit.

Payment history

The biggest, most apparent effect loans will have on your credit will come from your payment history. When you pay your student loans in a timely fashion, you’re seen as more creditworthy, and your credit score improves since your student loan payments are reported to one or more of the three credit bureaus (Experian, Equifax and TransUnion). In addition, when you pay off your loan, it will be reflected on your credit reports. On the other hand, failure to pay your student loans in a timely manner could negatively impact your credit with derogatory marks called delinquencies. Consecutive delinquencies put you at risk for defaulting on your loans, which would effectively tarnish your credit. The good news is that there are lots of arrangements that can help if you’re struggling to pay your student loan, even after you’ve defaulted.

Loan adjustment options

If you find yourself struggling to make your student loan payments or you’ve defaulted on your loan, you can make arrangements with your lender based on the rules governing the specific loans you’ve taken out. Each arrangement will have a different effect on your credit. It should be noted that these payment options usually only apply to government-issued student loans. That said, if you have a private student loan, you still have the option to ask for such plans — just know that it’s up to the lender’s discretion. Here are some of the payment options you can consider:

1. Income-driven repayment. This type of repayment plan calculates your ability to pay based on your existing income, according to the Federal Student Aid’s website. It doesn’t harm your credit, which means you don’t have to be afraid to seek it out, and when it’s used responsibly, this plan can even improve your credit by making it easier for you to budget so you can make timely and consistent loan payments.

2. Deferment/Forbearance. Deferment is a period of time where you’re not obligated to pay back loans, at no expense to your credit. It’s normally automatic, happening typically while you’re in school or during the first six months after your graduation. If you don’t meet the criteria for deferment but need a reprieve, you can make a case for forbearance which, in most cases, either reduces your monthly minimum payment or acts like a deferment for an extended period of time. While payments are not necessary during either circumstance, beware that some loans might still accumulate interest over this period, which means you’ll end up owing more in the long run.

3. Rehabilitation/Consolidation. There are two viable options available to individuals who default on federal student loans, according to the Federal Student Aid’s website. Rehabilitation allows you to “restart” payments with a preliminary period requiring nine timely payments. Successfully making all payments will remove any credit-marring defaults from your credit reports, although delinquencies will still stay. Consolidation is a similar plan, but the preliminary period only requires three timely payments and you get to adjust the interest rate of the debt. Unlike rehabilitation though, it does not remove defaults from your credit reports. It’s important to note that if you default while on either of these programs, neither will be available to you again. Although these options are normally reserved for federal loans, it’s possible some private lenders might be willing to offer similar plans, but, as detailed above, they’re in no way obligated to.

4. Full payment. If you’re ineligible for rehabilitation or consolidation, a lender will offer this option. In the instance you’re one of the few who can afford this expense, you’ll likely be able to negotiate a reduction in outstanding interest and be required to pay the total in full. While this deal may help you rid yourself of student loan debt, it can’t compensate for the hit your credit will take, as everything from the delinquencies to the defaults would remain on your report for seven years. It should be noted that paying the loan off in full is an option for all who have student loans, not just those who have defaulted on payments. That said, those who are not in default may not be able to negotiate a reduction in interest — it usually depends on the situation and lender.

5. Discharge through bankruptcy. You might have heard that even in bankruptcy student loans can’t be discharged. This is mostly true, but if you could successfully prove your loans to be “undue financial hardship” in court when declaring bankruptcy the loans will be discharged. Negative marks will be removed from your credit, but the bankruptcy declaration is its own penalty, as it will essentially destroy your credit for seven years and make it very challenging to open new lines of credit.

6. Cancellation/Forgiveness. There are circumstances where you don’t have to declare bankruptcy to get a discharge, according to the Federal Student Aid’s website. These typically fall into two categories: cancellations and forgiveness. Cancellations require you to meet a specific need or be the victim of a specific circumstance. For example, the Total and Permanent Disability Discharge plan, which is a cancellation plan, requires you to be on social security disability and unable to work full time. In many cases, cancellation plans will erase the debt but, depending on the discretion of the lender, any derogatory marks might remain on your credit. On the other hand, forgiveness is much the same, but it’s a slower, more gradual process. One forgiveness plan, the Public Service Loan Forgiveness, requires you to meet the criteria (working in a government or nonprofit sector job) and have made 120 timely payments, or 10 years’ worth of payments.

To learn more about credit, keep reading our credit report monitoring blog. There, you’ll find tips on everything from repairing your credit to building it from scratch and maintaining it.