How Student Loan Deferment May Affect Your Credit Score

While it might seem like pausing payments would hurt your credit, a formal student loan deferment is a neutral event that won't directly lower your score. Here’s how it can indirectly play out.

1. Initial Reporting: When your deferment is approved, your lender notifies the credit bureaus. Your loan's status is updated to "deferred," which is a neutral notation and does not negatively impact your credit score.
2. Interest Accrual: During deferment, interest often continues to build, particularly on unsubsidized loans. This doesn't affect your score at the time, but it increases the total amount you will eventually owe.
3. Interest Capitalization: Once the deferment period ends, the accrued interest is typically capitalized, meaning it's added to your principal loan balance. This action increases your total debt obligation.
4. Adjusted Future Payments: Because your principal balance is now higher, your required monthly payments will likely increase when repayment resumes. This can strain your budget more than your pre-deferment payments did.
5. Potential for Missed Payments: The primary risk to your credit comes after deferment. If the new, higher monthly payment leads to a missed payment, that delinquency will be reported and can significantly damage your credit score.

How Much Will a Student Loan Deferment Affect Your Credit Score?

A student loan deferment itself won't tank your credit score, as it's an approved pause in payments. Here are a few key considerations for how it can influence your credit profile:

• No Negative Reporting: Student loan deferment is a formal agreement with your lender, so it isn't reported as a negative event. Your credit report will show the account is in deferment, which is a neutral status.
• Credit History Length: Keeping your student loan account open during deferment helps lengthen your credit history. A longer credit history is a positive factor for your credit score over time.

How You Can Avoid a Student Loan Deferment Affecting Your Credit Score

Consider an Income-Driven Repayment Plan

An income-driven repayment (IDR) plan adjusts your monthly payment based on your income. This could result in a very low or even $0 payment that still counts as being on time, which can be a better alternative for your credit than a standard deferment.

Make Interest-Only Payments

For unsubsidized loans, interest accrues during deferment. Making interest-only payments prevents your loan balance from growing. This proactive step shows lenders you are responsibly managing your debt, which can positively influence how your credit history is viewed, even with the deferment in place.

Ways to Improve Your Credit Score

Improving your credit score is an achievable goal that hinges on consistent, positive financial behavior. Regardless of your starting point, taking deliberate steps can lead to meaningful changes within a few months, boosting your overall financial health.

• Monitor your credit reports regularly. You can obtain free credit reports from the three major bureaus to check for inaccuracies, dispute errors, and track your progress.
• Establish automatic bill payments. Since payment history is the most significant factor in your score, setting up automatic payments ensures you never miss a due date.
• Reduce your credit utilization ratio. Aim to keep your credit usage below 30% of your total available credit, as high balances can signal risk to lenders.
• Become an authorized user. Being added to a credit card account that has a strong payment history and low utilization can help improve your own credit profile.
• Diversify your credit mix. Maintaining a variety of credit types, such as credit cards and installment loans, shows lenders you can responsibly handle different kinds of accounts.

The Bottom Line

Student loan deferment won't directly hurt your credit score, as your account is considered current. However, interest can still accrue, increasing the total amount you owe over time.

Frequently Asked Questions

Will my credit score drop when my student loan deferment ends?

Not necessarily. If you resume making on-time payments as soon as the deferment period concludes, your credit score should remain stable or potentially improve over time.

Does applying for deferment involve a hard credit check?

No, applying for student loan deferment does not require a hard credit inquiry, so the application process itself will not directly impact your credit score.

Can deferment hurt my chances of getting other loans?

It might. While deferment doesn't lower your score, lenders consider your total debt. A large deferred loan balance could affect your debt-to-income ratio negatively.