Are Student Loans Installment or Revolving Credit?

Understanding whether a student loan is an installment or revolving loan will give you insights into how to use funding. Plus, you can be prepared as to when you’ll be responsible for making payments and whether the amount you owe will fluctuate or remain the same. 

Borrowing money to pay for your college education may feel nerve-wracking, but the first important step is to understand the loans you want to use so that you are aware of what is the best decision for your financial needs. Learn more about student loans and how they may affect your credit score. 

Is a student loan an installment loan or revolving credit? 

Student loans—both federal and private—are installment loans. That means you borrow a lump sum and repay it over time at an agreed repayment period. As the borrower, you must repay the loan until your balance reaches zero. 

The loan is considered closed once you’ve paid off the balance you owe. That means you must apply again for a new loan if you need to borrow more money. 

Regarding federal student loans, you must fill out and submit the Free Application for Federal Student Aid (FAFSA) each school year you plan on applying for financial aid. Your balance, or the amount you owe, will grow each year until you graduate or decide you don’t have to borrow additional money. 

Private student loans operate similarly, although each lender will have their application process as to how you are to submit information to borrow student loans.  

Installment vs. revolving 

Whereas installment loans are ones where you borrow a lump sum of money, revolving loans allow you to borrow up to a credit limit. As you pay back the amount owed, you can borrow money again. 

There are other differences, such as repayment terms, refinancing options, and more. However, you will find some similarities, like interest rates and the ability to consolidate some debts. 

Look at the following table to understand the difference between the two loan types. 

	Installment	Revolving
Interest rates	Typically fixed rates (some private student loan lenders offer variable rates)	Typically variable interest rate, though fixed-rate loans are also available
Repayment terms	Fixed based on agreed-upon loan terms	Repayment can last indefinitely
Grace period	Federal and private student loans typically offer a grace period Other types of loans may not have one	Typically no grace period
Refinancing options	May be able to refinance or consolidate depending on financial profile and availability	Typically can’t refinance but consolidation to installment loans is available
Loan balance	Loan balance is fixed	Can grow until limit reached and overall balance can go up to more you keep borrowing
Repayment amounts	Same through loan period unless interest rate changes	Fluctuates depending on the amount you borrow

Based on these characteristics, student loans are installment loans due to the fixed amount you can borrow. Plus, borrowers can’t seek additional funding unless they apply for a new loan. 

How do student loans affect your credit score?

Student loans can affect your credit score depending on the types of financial behavior that’s reported to the three major credit bureaus—Experian, Equifax, and TransUnion. When it comes to calculating your credit score, credit scoring agencies use the following factors to assess your creditworthiness:

• Payment history: This factor looks at when you’ve paid any existing loans you owe. It can look at whether you paid on time, have late or missed payments, and even loans that have gone to collections. 
• Amounts owed: Scoring models look at your revolving credit accounts and the balance owed on them. In other words, it looks at your credit utilization or the percentage of your credit limit you’re using. The higher the credit utilization, the more you tend to rely heavily on credit. 
• Length of credit history: Credit bureaus report how long you’ve had accounts open for and when they were closed. The longer your credit history, the more credit scoring bureaus have a better insight into how you’re handling credit. 
• Credit mix: Your credit mix refers to the types of loan accounts you have. For example, credit scoring models look at the variety of credit you’ve used, like credit cards, auto loans, and mortgages. 
• New credit: Any loans you’ve applied for or opened will show up as new credit in your credit report, affecting your credit score. The more applications you submit or new loans you’ve opened in a short period, the more it can appear you need to rely heavily on credit, which affects your score. 

Your student loan may appear on your credit report, similar to other types of loans. Since it’s an installment loan, your lender will typically report when the account was opened (like when your loan was disbursed or the application was approved). This could affect your credit score temporarily since the loan, at this point, counts as new credit.

Another factor that could affect your credit score is your payment history. It’s one of the most influential factors. Whether you paid on time, late, or missed payments, your payment activity will most likely appear on your credit report. Credit scoring agencies will look at it to help calculate your credit score. 

Though it may not affect your score as much as payment history, your student loan may affect your credit mix and contribute to the overall average of your credit history length.

Since student loans aren’t revolving credit, the amount you owe won’t affect your credit utilization. That’s because you owe a fixed amount, and what you borrow doesn’t depend on a credit limit a lender grants you.

I encourage you to make loan payments while in college if you can. Doing so extends your length of payment history, which can improve your credit score.

Michael Menninger

CFP®

How to choose the best loan for you

No matter what type of loan you borrow for your college education, it’s important to read over the application and loan documents carefully. Doing so will help you understand what your rights are as a borrower. 

It will also give you insights into important aspects such as your minimum payment amounts, the overall amount of interest you’ll pay, and what happens if you’re struggling to make payments.

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