How Student Loan Forgiveness Will Affect Your Credit Score
Last month, the White House announced a sweeping plan to write off student loan debt for millions of Americans, writing off debts of up to $10,000 for some borrowers and $20,000 for those who received Pell grants . If you have taken student loans, they will affect your credit score anyway (these are loans , after all). And for the millions of people eligible for student loan forgiveness , this upcoming change in your loan status will change your credit score, possibly for the worse, if only for a little while. Here’s what you need to know about how student loan forgiveness can affect your credit score.
Your credit score may drop – at least in the short term.
Student loans contribute to your credit balance , which refers to the variety of loans you have (eg car, mortgage, etc.). How well you manage your loan portfolio affects your overall score, and lenders like to see your ability to manage multiple types of loans at the same time. Student loan forgiveness lowers your credit balance, which can lead to a slight drop in your credit score.
Another reason student loan forgiveness can have little effect on your credit score is that it can lower the average age of your credit scores, as student loans are often among the first loans people take out.
Ultimately, none of this is a cause for concern— according to CNBC , your credit score will only drop 5 to 10 points. And, as Money.com explains, as long as you keep making other loan payments on time, your credit score can recover relatively quickly. Perhaps the temporary drop is important for you to keep in mind in the near future, but it probably won’t affect your ability to get loans in the long run.
Bottom line: loan forgiveness is worth it
A rapid drop in your credit score should not deter anyone from seeking credit forgiveness. A few lost credit scores are insignificant compared to the importance of eliminating debt. Keep in mind that even if your loans disappear from your credit report, you are still responsible for paying them back, so if you are looking at your debt and thinking, well, fuck it , then you should read what exactly will happen. if you simply ignore your student loans .
The only other thing to consider right now is how your credit score affects any plans to borrow money or finance a major purchase. If you are looking for a new car or home, try to get pre-approved as soon as possible so that your credit score is as high as possible when you apply. The student loan cancellation application does not open until early October, so your credit score will change much later.