Does your student loan affect your credit score?

Unlike other loans, a UK student loan won’t affect your credit score. This means you can still borrow money in the future, even if you have outstanding student debt.

They work a little differently to other ways of borrowing money. For instance, the amount you repay is based on your future earnings, not on the amount you borrowed. And if you don’t meet the earnings threshold for repayment, you don’t need to pay it back at all.

It can get a little confusing. Let’s take a look at what’s on your credit report, how student finance differs from other loans, and some cases where student finance can affect your borrowing.

What’s on your credit report

Your credit report is a record of your financial history. If you ever want to borrow money, the bank or lender will check your credit report to see if you’re able to pay it back.

During this ‘credit check’, lenders will see your report data, which includes information on:

• Any debt you have. We’re talking about debt from private banks or lenders – not your student debt. If you’ve taken out an overdraft, used a credit card as a student, or taken out a personal loan, it’ll be on your report.

• How often you’ve applied for credit and how many ‘hard’ credit checks you’ve had as a result. If you’ve applied for a credit card or a mortgage, this will show on your credit report. A large number indicates to lenders that you may have tried to borrow lots of money within a short space of time.

• Whether you’ve paid your bills on time or missed a payment. This could be a utility bill or a credit card repayment. If you’ve missed a payment – even during your student days – it can show up on your credit report.

• Whether you have a financial relationship with someone else. For instance, you may have a joint mortgage with someone else, or be a guarantor.

All of this information is combined with other details (such as whether you’re registered on the Electoral Roll) to determine whether you’re likely to be able to pay back a loan.

But, as we say, your student loan won’t appear on your credit report. Let’s talk about why.

Why UK student loans aren’t like other types of borrowing

For many people, a student loan might feel like a daunting financial burden. But, in reality, they’re not like other debts.

That’s firstly because you’re borrowing from the government, rather than a private bank. As you’ll likely know, your student finance is managed by the Student Loan Company (SLC), which is owned by the government.

As a result, the terms of the loan are very different from those of other types of loans:

• To get a student loan, you don’t need to prove you can afford it. Everyone who studies for a full-time UK degree is eligible for student finance (unless they already have a degree, they’re over 60, or they’re not a UK resident). Unlike other loans, you don’t need to show how you’ll pay it back.

• Repayments are based on your future earnings, not how much you borrowed. The precise amount you’ll pay is a percentage of your income.

Example: If you started uni after 2012, you’re on what’s known as the Plan 2 repayment plan. That means you’ll repay 9% of anything you earn over £27,295 a year. You can find out more about repayment plans on gov.uk.

• If you don’t earn enough, you won’t pay. You don’t need to repay anything until you earn above a certain threshold. That threshold depends on when you started uni, but it’s typically about £27,000.

• Repayments are taken automatically out of your pay – just like income tax. This means you can’t forget to repay it.

• The loan expires after a certain period. Depending on when you started uni, any outstanding balance on your student loan will expire after 25 or 30 years. That means you no longer have to pay, no matter how much you still owe.

• Your student loan is your debt alone. That means that it can’t be transferred to your spouse or family if you can’t repay it. If you get married, your partner’s income won’t affect your repayments either.

In short, your student loan doesn’t work like other types of borrowing. And the good news is, even if you leave uni with a large amount of student debt, you can still have a good credit score.

How student finance can affect your ability to borrow

Your student loan itself won’t affect your credit score. But there are times when what you’ve borrowed as a student can affect your ability to get a loan in future.

1. If you took out a bank loan to cover your studies, it may affect your credit score

Everything we’ve said so far about student finance and your credit score only applies to those loans managed by the SLC, the Student Loans Company. If you took out a different kind of loan to support your studies, this would affect your credit score.

Sometimes, students take out a personal loan from a bank. For instance, you may want to borrow money to support a year in industry. Or you may not be eligible for a loan from SLC, if you’re not a UK resident or you’re over the age of 60, so you may take out a personal loan.

In these cases, the terms of the loan will be much like any other type of loan. That means repayments won’t come automatically from your salary. And it won’t expire like an SLC student loan. This type of loan will also appear on your credit report.

2. If you went into other kinds of debt during your student days, it will be on your credit report

Your credit report includes all the details of any debt or outstanding payments you may have. So, if you have any other kinds of debt as a student – your student loan aside – this will affect your credit score.

For instance, if you owe a lot of money on your electricity or gas bill, this will show on your credit report. Similarly, if you’ve gone deep into your overdraft and don’t keep up with repayments, this can also affect your credit score.

On the other hand, if you have an overdraft and use it sensibly, it can improve your score. For example, if you stay within your limit and repay what you owe quickly, it can show you’re a responsible borrower.

3. Student loans can affect your affordability for a mortgage

If you apply for a mortgage, the lender will check your credit history and your ability to afford the repayments. While your student loan won’t affect your credit, it can be used to see how much you can afford.

For instance, imagine you’re repaying £150 a month on your student loan. That money’s coming out of your income, meaning you’ll have less to spend overall. If you have lots of other expenses – for instance, childcare or travel – the lender might decide that you can’t afford to pay for mortgage repayments too.

That said, many graduates get a mortgage even if they’re still paying off their student loan. Talk to the lender who is offering you the mortgage to find out more.

4. If you move abroad, you can fall behind on student loan payments

If you have a student loan and you stay in the UK, your repayments will come straight out of your salary. But this isn’t possible if you move abroad.

The SLC asks that you inform them if you leave the UK for more than three months. In this case, you’ll usually need to pay your student loan by direct debit.

If you don’t pay, you can fall into arrears on your student loan. And you’ll have to pay these even if you don’t meet the minimum threshold for repayments. You can find more about payment arrears on gov.uk.

These arrears won’t show up on your credit report either. However, if you’re having to pay them back, it can affect your mortgage affordability.

To recap:

Your student loan is not on your credit report at all. However, your student loan will affect how much lenders think you can afford to borrow on a mortgage. Plus, other kinds of loans and credit that you took out as a student will be on your credit file.

Take your credit health into your hands.

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