Many borrowers with student loan debt are facing the tough reality that the student loan cancellation they had hoped for is not likely to happen anytime soon. The Supreme Court recently ruled against President Biden’s student loan forgiveness plan which would have forgiven up to $20,000 in student loan debt for borrowers. 

In addition to concerns about budgeting for student loan debt student loan payments after the payment pause ends October 1, 2023, those who are small business owners (or hope to be) may also wonder how student loan debt will affect their business credit scores. 

It’s understandable that many borrowers are worried that student debt may affect their entrepreneurial ambitions. Almost half of millennials surveyed reported that student loan debt was a barrier to entrepreneurship, according to a 2016 Small Business Majority survey.  

Here’s what you need to know about the link between student loans, personal debt and how student loans affect credit, both personal and business credit. 

The Basics of Business Credit Scores

Business credit scores (also known as commercial credit scores) are created to help lenders assess the creditworthiness of businesses. Similar to personal credit reports and personal credit scores, they look at factors such as payment history and debt to calculate a score that helps lenders understand the risk of lending money to a small business. 

Read Nav’s comprehensive guide on how to establish business credit.

The Relationship Between Personal and Business Credit Scores

Business and personal credit reports are maintained separately from each other. In other words, information in a personal credit report will not appear on a business credit report unless the lender (or furnisher) supplies it to each type of credit bureau.

If you’re a small business owner applying for a small business loan or financing, however, it is not unusual for the lender to check personal credit as well as (or instead of) business credit. 

Some types of financing, such as invoice financing or business cash advances, may allow for lower personal credit scores, while others such as bank financing or business credit cards, may require good or even excellent credit scores. 

Understanding the Direct Impact of Student Loans on Business Credit Scores

Business credit reports don’t contain information about how business owners manage their personal debts, such as student loans. From that standpoint, student loan debt does not directly impact business credit scores. 

Again, though, certain types of financing may require good personal credit and that may create an indirect effect on your businesses’ ability to qualify for financing. 

If you’re wondering how to improve your business credit scores with student loans, you won’t see a direct impact on your business credit from paying student debt. But other strategies can help, such as paying a business line of credit or vendor accounts on time.

Managing Student Loan Debt for Optimal Business Credit Scores

Whether or not you pay your student loans on time will have no bearing on your business credit scores. In that sense, it may be encouraging to know that you can still build business credit even if your personal credit isn’t perfect. 

But for most entrepreneurs, business and personal finances are closely intertwined. If you find it difficult to pay your student loans, you may have a harder time devoting yourself to your entrepreneurial endeavors. For that reason, you’ll want to explore every avenue possible for finding a solution to your student loan debt. (Understand that for some borrowers, there may not be any good solutions, however.) 

Student loan payments will resume October 1, 2023. VantageScore warned in June 2023 that anywhere from 34% to 76% of student loan borrowers were at risk of missing their first required federal student loan payment, which could result in a credit score drop of between 49 and 82 points on average per consumer missing a payment. 

However, after the Supreme Court struck down President Biden’s student loan forgiveness plan, the White House announced a series of initiatives to tackle student loan debt. As part of the announcement, it announced that there will be a one-year reprieve from negative credit reporting for certain student loans. Specifically: 

“The Department is instituting a 12-month ‘on-ramp’ to repayment, running from October 1, 2023 to September 30, 2024, so that financially vulnerable borrowers who miss monthly payments during this period are not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies.”

While there may be a temporary reprieve from negative credit reporting, that doesn’t change the fact that payments restart soon, and if borrowers can’t make them, eventually their credit scores may be affected. “The payments will become due eventually and while some borrowers will have a longer ‘on ramp’ to save up, many are unfortunately likely to still miss their first payment,” warns Jeff Richardson, senior vice president, marketing and communications at VantageScore. “Therefore, the impact to their VantageScore credit score remains the same.”

Here are the top options to explore if you have federal student loan debt. (Private student loans are different from federal student loans and the same options or protections are not available.)

Income-based Repayment

An income-driven repayment plan can offer a repayment plan with reduced payments (as little as $0) for those who qualify based on income. Balances remaining after a period of time, usually 10, 20 or 25 years of qualifying payments, can be eligible for forgiveness. 

A brand-new proposed income-driven repayment program called Saving on a Valuable Education (SAVE) plan will, if implemented as proposed, cut in half the amount that borrowers have to pay each month from 10% to 5% of discretionary income, forgive balances in ten years instead of twenty years for borrowers who originally borrowed less than $12,000, and stop charging borrowers with unpaid interest. Find more details on this program on the Department of Education’s website here. 

Public Service Loan Forgiveness (PSLF)

This program is aimed at providing student loan forgiveness to teachers, firefighters, nurses and others who work in certain public service jobs with forgiveness of certain student loan debt. This program was overhauled during the pandemic and more borrowers than before may qualify for partial or complete forgiveness. Learn more about PSLF here. 

Loan Cancellation

Some borrowers may be eligible for borrower defense loan discharge (cancellation) if a school misled them or engaged in other misconduct in violation of certain state laws. You can apply for this student loan debt relief here. 

Deferment or Forbearance

With deferment or forbearance, borrowers can apply to stop making payments for a limited period of time. While these programs may provide immediate relief from payments, and protect the borrower from default, interest continues to accrue. 

Student Loan Refinancing

Student loan refinancing has been a strategy popular in the past. With this option, borrowers with good credit have been able to refinance student debt at a lower interest rate. However, with rising interest rates it may be less beneficial. 

And there’s a real potential downside. When you refinance a federal student loan through a private lender, it becomes a private loan (similar to a personal loan) and you lose the repayment options that may be available to federal student loan borrowers. 

Fresh Start Initiative

A new program called the Fresh Start Initiative is designed to help borrowers with certain types of federal loans get out of default, and have the default removed from their credit reports. It’s a one-time opportunity to get back on track with student loans. Learn about the Fresh Start Initiative here.

Balancing Business Growth and Student Loan Obligations

Some borrowers who can afford to pay their student loans when the payment pause resumes may still find it difficult to pay off debt while growing their small business. 

A comprehensive research report by the Kauffman Foundation found that “student loan payments reduce the amount of cash that is available for individuals to invest directly in entrepreneurial activities.”

You’ll want to create a student loan payment plan that at least keeps your debt in good standing to avoid negative information on your consumer credit file. Beyond that, you’ll have to decide whether paying more toward your debt or investing in your business is the best use of your funds. 

Keep in mind that if you can’t keep up with required payments on your student loan debt, your loan may wind up in default and the late payments/default may be reported to the major credit bureaus. If you have a co-signer, their credit history may be impacted as well. You may want to set aside emergency funds to help make sure you can continue to make payments if your business cash flow is slow. 

You can review your free credit reports (consumer credit only) at annualcreditreport.com. This does not provide you with business credit reports or scores.

FAQS

What Strategies Can I Use To Minimize the Impact of Student Loans on My Credit Scores?

First let’s review how credit scores like FICO scores are calculated and how student loans can affect credit scores. 

The biggest credit score impact from student loans will come from missed payments. 

If at all possible, you want to minimize late payments on your credit reports due to missed payments on student loans. 

Federal student loan borrowers can explore the options above to reduce their payments or even cancel certain payments (or get loan balances forgiven in the future.) Depending on the type of loan, though, not all options will be available. 

If you’re making on-time payments, the next question is how debt affects your scores. With most credit scoring models, the amount of debt a borrower has is less important than whether those debts are paid on time. However, credit mix is one of the main credit scoring factors and it helps to have a mix of different types of credit accounts including revolving accounts like credit cards and installment loans like auto loans or student loans. 

While you will need to work with your servicer, expect to be your own advocate. Student loan servicers are expected to be flooded with requests for help due to the end of the pandemic payment pause, and may not always give complete or accurate information about options. Review resources from the Department of Education and keep good records of any correspondence with your loan servicer. 

Are There Any Loan Forgiveness Programs Specifically Beneficial for Entrepreneurs?

There are no loan forgiveness programs specifically designed for small business owners or entrepreneurs. You’ll need to look for other options such as those listed above if you hope to get your student loans forgiven. 

Are There Alternative Financing Options That Won’t Impact My Business Credit Scores?

Personal debts, including student loans, generally don’t impact business credit scores. Exceptions would be:

• Personal loans used to fund a business. Personal loans are almost always reported on personal credit reports (usually as installment loans), and will affect the borrower’s personal debt-to-income ratio. 
• Business debt with a personal guarantee. These loans may be reported on the borrower’s personal credit, but typically will not be unless the borrower defaults. 
• Any loan involving a personal credit check. This will create an inquiry on the personal credit report which may have a small impact on the borrower’s credit score. Some business loans only involve a soft inquiry which does not impact the credit score, while others may create a hard inquiry which may have a small impact on the applicant’s personal credit score. 

When it comes to business loans and financing, any business loan that is reported to commercial credit agencies can help build business credit as long as it is paid on time.