Does Deferring Student Loans Hurt Your Credit?

If you have federal student loans, you might be eligible for deferment in specific situations, like while you’re enrolled in school or when you’re experiencing financial hardship. During deferment, your payments are paused, but does deferring student loans hurt credit? 

Student loan deferment: credit score impacts

Deferring student loans generally won’t hurt your credit score. During deferment, your lender allows you to stop making payments on your loan for a short period of time. You can only defer a student loan in specific situations, including the following:

• Being enrolled in school
• Active military service
• Unemployment
• Financial hardship

As long as you didn’t miss payments before your loan was deferred, deferment itself shouldn’t impact your score.

How deferment is reported to the credit bureaus

Even though deferment isn’t inherently bad for your credit, it still must be reported to credit bureaus. If it wasn’t, lenders may assume that you’ve simply stopped making payments.

If your student loan has been deferred, it will usually be marked as “deferred” or “in deferment” on your credit report. The mark itself doesn’t impact your score, but because lenders can see it, it might impact their risk assessment.

For example, imagine you have $100,000 of student loan debt that has been deferred while you’re in school. If you apply for a mortgage while you’re still enrolled, the lender might consider your future student loan repayment schedule when deciding how much to approve you for.

The difference between deferment and delinquency

These two terms may sound similar, but they’re very different. A deferment is a proactive pause in your loan payments, and a delinquency is when a payment is missed.

Both are possible if you’re dealing with financial hardship or otherwise having trouble repaying. But to lenders, deferment looks far better. 

Unlike deferment, delinquency hurts your credit score, and the damage can be very substantial. A single delinquent payment is enough to lower your credit score by 100 points or more. Like other negative marks on your credit report, it stays there for seven years.

When does deferring student loans hurt credit?

Having a loan in deferment doesn’t inherently lead to credit damage. However, there are a couple of scenarios where you might see your credit score drop around the time of deferment.

If deferment follows a period of missed payments

If you’ve missed one or more loan payments and are trying to avoid default, your lender might offer a short period of deferment as a possible solution. Pausing payments for a few months may be enough to help you get back on track.

However, deferring your loan doesn’t erase those prior missed payments, and they’ll likely still damage your score. In this scenario, the missed payments, rather than the loan deferment, would be responsible for the drop in your score.

Interest capitalization and its indirect effects

If you have subsidized federal loans, interest doesn’t accumulate while your loan is deferred. However, if your loan is unsubsidized, interest continues to accrue. 

If you don’t pay the accrued interest before the end of the deferment period, the interest capitalizes, meaning it gets added to the principal balance, and future interest will be calculated using a larger loan amount.

The capitalization itself shouldn’t impact your score, but it may lead to higher monthly payments and a longer loan term. If you struggle to make higher payments, there is an increased risk of missing one or more payments.

Having a longer loan term isn’t necessarily bad for your credit, but it means that there’s more time for you to encounter problems that may lead you to miss a payment.

If you have unsubsidized loans in deferment, many financial experts suggest making interest-only payments if possible. If you can manage to pay interest as it accrues, you’ll avoid the problems that can come with interest capitalization.

Deferment vs. forbearance: What is the difference for your credit?

If you need to temporarily stop payments on your student loans but don’t qualify for deferment, forbearance is an option. Both subsidized and unsubsidized loans in forbearance accrue interest.

Like deferment, forbearance is typically noted on your credit report, but it doesn’t directly impact your credit score. Lenders can still see it, and it may inform their lending decisions.

Looking for new ways to improve your credit?

During student loan deferment, credit scores usually aren’t impacted. If you’re a student loan borrower, it’s important to have a clear idea of how your loans may affect your score. And if you’re looking to establish good credit for the first time or improve a credit score that isn’t quite where you want it to be, it helps to have a plan.

Kikoff is a credit builder app that could help you pave the way to better credit and better opportunities. Once they sign up, most of our members start with our interest-free credit line. You use that credit line to purchase items in our online store, and as you pay off your purchases over time, we report your on-time payments to credit bureaus.

We also offer a wealth of other tools and resources and even give you personalized insights to help you move toward financial freedom.

It’s free to join, and we don’t check your credit. Get started with us today!