Ready to pay off your student loans? Here’s how — and what happens to your credit
You’ve been doing exactly what you thought you were supposed to: You paid your student loans on time every month and finally paid them in full. And then your credit score drops.
Why did that happen? Let’s talk about it.
Student loan repayments have been paused for three years, but payments will start again in October and interest starts accruing in September.
What actually happens when you pay off your student loans?
How do you pay off your loan?
Your current balance and payoff amount are not the same thing.
If you’re paying off your loan in full, you need to contact your student loan servicer to get a loan payoff quote, according to NerdWallet. This will show you the exact amount you have to pay and includes any interest owed through when you plan to pay off your loan.
Otherwise, you might get another bill with the interest that had already added up by the time you made the payment.
Should you pay early?
If you can pay your loans early, you’ll save on interest, according to Investopedia. Federal student loans haven’t been accruing interest for the last three years, but interest will start accumulating again in September.
Paying these off also gives you a lower debt to income ratio, which can help when applying for a mortgage, for example.
Before you make a lump-sum payment on your student loans, you should also consider building your emergency fund, retirement savings or paying off high-interest debt, according to NerdWallet.
Generally, there aren’t penalties for paying your loans early.
However, it could affect your credit score.
How does it affect your credit score?
Paying your student loans on time has a positive effect on your credit score.
Reminder: your credit score, according to the Consumer Financial Protection Bureau, predicts how likely you are to pay back a loan on time. There are three credit bureaus: Experian, TransUnion and Equifax.
Just like car loans and mortgages, student loans are considered installment loans. That means that the borrowed funds are repaid over time through equal monthly payments. When these accounts are closed, the payment history you’ve built up won’t affect your score as much.
When you pay off your loan in full, it will show up as paid on your credit report. Experian says paying it off “looks good on your credit history, but it may not have a dramatic impact on your credit score.”
When you make that final payment on your student loan, you might see a brief drop in your credit score — especially if you don’t have any other forms of credit on your report. Your score should recover in a few months. You could also see a small increase after paying it off, according to Experian.
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This story was originally published August 8, 2023 at 5:00 AM with the headline "Ready to pay off your student loans? Here’s how — and what happens to your credit."
