How Paying Off Student Loans Impacts Your Credit Score

Student loan debt can feel like a weight strapped to your back, preventing you from achieving the goals you care most about. When you finally make your last payment, you might expect every aspect of your financial life to improve – including your credit score.


However, the answer to “What happens when I pay off my student loan” can be surprising. In many cases, your credit score may even dip after paying off your last loan.


Finding out that paying off student loans can hurt your credit score is a disappointing surprise for some borrowers. But while this may seem disheartening, it’s also incredibly common and a small price to pay for becoming debt-free.


In this blog, we’ll take a closer look at how paying off student loans can impact your credit score, as well as how you can offset the changes.


What Happens When You Pay Off Student Loans

There are several different components that make up your credit score. Credit mix is one of those components, accounting for 10% of your score. 


Credit mix refers to having installment loans, like student loans, and revolving credit, like a credit card, on your credit report. Ideally, you should have both types of credit on your report. If student loans were your only form of installment loan, then paying off your student loans may cause your credit score to drop slightly. 


Rod Griffin, senior director of consumer education and awareness at Experian, said another reason why paying off your student loans might hurt your credit score is that any significant change in your credit report can result in a temporary score reduction.


“Scores sometimes dip a bit initially when a large debt is paid off because of that change, but they tend to rebound quickly,” he said. 


Because scores can drop after paying off debt, Griffin said borrowers should wait a month or two after paying off their student loans to apply for a new loan. This provides enough time for your score to rebound. Griffin also said that if you made your student loans payments on time, that history will continue to help your credit score even after paying off your loans. 


But if you made any late payments or your loans went to collections at some point, those red marks will remain on your credit report for seven years. Fortunately, they will impact your score less with each passing year.


How to Correct Your Credit Score After Paying Off Student Loans

If you’re worried that paying off student loans will hurt your credit score, following a few basic principles is the best course of action. First, keep paying your other bills by the due date. On-time payment history makes up 35% of a credit score and is the most important factor.


Next, keep your credit utilization below 10%. Credit utilization refers to how much credit you’re using out of the total credit limit you have on your credit card. For example, if your total credit limit is $1,000, you should only charge $100 on your credit card per statement cycle. Credit utilization counts for 30% of your credit score and is the second most important component.


Third, avoid opening new credit accounts. Every time you open a new credit account, like a loan or credit card, the average age of your credit history will decrease. This is worth 15% of your credit score, so only open a new account if you absolutely need to.


Benefits of Paying Off Student Loans 

If you’re wondering, “What happens when I pay off my student loans,” it’s important to keep the impact on your credit score in perspective. Even though your credit score may drop temporarily after paying off your student loans, the benefits far outweigh the drawbacks.  


When you pay off your student loan debt, you can finally set new financial goals like:


  • Buying a house:

    When you apply for a mortgage, the lender will look at your

    debt-to-income ratio

    , your total monthly debt payments divided by your monthly income. When you pay off debt, your debt-to-income ratio will decrease, and the amount you can borrow will increase.

  • Investing more for retirement:

    A basic rule of thumb is to put between 10% and 15% of your income toward retirement, but this can be difficult to accomplish with a student loan balance. When you pay off your loans, you can put that money into your retirement accounts.

  • Paying off other loans:

    If you have other loans, you can apply your previous student loan payment amount toward your other debt. This will allow you to repay that debt faster, ultimately costing you less interest in the long run.


Tips for Paying Off Student Loans Faster

If you haven’t paid off your student loans yet, you may want to consider accelerating the process. When you pay off your loans, you can use those funds to start a small business, go on vacation, invest in the stock market, or work toward any other financial goal that is important to you.


Here are some of the best strategies to pay student loans off faster:


  • Start a side hustle 

  • Put unexpected windfalls toward your loans

  • Create a budget to monitor your spending habits

  • Ask for a promotion or look for a better-paying job

  • Refinance and

    consolidate student loans

    to a lower interest rate


Refinance Your Student Loans With ELFI

If you want to pay off your loans quickly, one of the best ways to accelerate the process is to refinance your loans to a lower interest rate. For example, let’s say you owe $60,000 with a 10% interest rate and a 15-year term. If you refinance to a 6% interest rate and a 15-year term, your new monthly payment will be $138 less each month.


If you keep making your old monthly payment, you’ll pay off the debt four years and six months ahead of schedule – while paying $10,204 less in interest over the life of the loan. This is one of the major benefits of student loan refinancing.


ELFI offers student loan refinancing with rates comparable to other lenders in the industry, with no application fees and prepayment penalties.* If you refinance with ELFI, you’ll receive a personal student loan advisor who will guide you through the whole process from start to finish. Try our student loan refinancing calculator to see how much you could save.