College students have the option of taking out student loans directly through the government, called Stafford loans. Once you have signed up for this loan, the account goes on your credit report. For some students, this is the first credit account added to their report, while others may already have an established credit profile. Completely paying off this loan has different effects depending on elements contained in the rest of your credit profile.
Credit Score Factors
Your credit score is a number that lenders use to help them determine whether to offer you a loan. The score is calculated using five main category factors, according to MyFICO. The factors are payment history, account balances, period of time you've had credit accounts, new credit accounts and your credit account diversity.
Credit Length
Federal student loans may be your first or only credit accounts shown on your credit report. The average of all of your credit accounts determines your credit length, so if you pay off your oldest account, the student loan, your average may lower, as the account no longer ages once you have paid it off. If you have accounts that are older than your student loans, or ones that are close to its length, your credit score should not be negatively affected by paying off the loan. Positive accounts such as student loans can stay on your credit report for as long as the company wishes to report the information.
Balances
Paying off your federal student loans can have a positive effect on your credit score due to lowering the balances on the account, as well as proving to lenders that you can completely fulfill your debt obligations. This factor can have a positive effect on your credit score.
Interest
You also have a benefit to paying off your federal student loan early, outside of any credit score alternations. When you pay off the balance of your loan, you no longer accrue interest on the loan. Depending on the amount of your student loan, you can save hundreds or thousands of dollars in interest payments.
Tags: your credit, student loans, credit accounts, credit report, credit score, student loan