Student loan forgiveness could temporarily hurt your credit — but that doesn’t mean you should be concerned about it.
President Joe Biden’s plan will forgive up to $20,000 in student loan debt for qualified borrowers. If you’re eligible for forgiveness, the plan can put thousands back into your pocket. But along with the benefits of lowering your monthly payments and potentially paying loans off more quickly, there is at least one downside worth knowing about, even if it’s temporary.
Your credit score could take a negative hit due to how some scoring factors are affected by changes to your accounts. Luckily, it’ll only affect your score for a short time. And what’s more, you’ll only see the drop in your score when your loan accounts close — which means you won’t be affected if you owe more than what’s forgiven.
“You could experience a small ding in your score, but it’s nothing that I would worry about, because over time that will bounce back,” says Beverly Harzog, credit card expert and consumer finance analyst for U.S. News and World Report.
Here’s exactly how student loan forgiveness can affect different factors that go into your credit score, and how you can maintain great credit despite any short-term hits.
How Loan Forgiveness Can Impact Your Score
Student loan forgiveness largely impacts three factors that make up your credit score or your ability to apply for lending products: mix of credit, age of account history, and debt-to-income ratio.
Credit profiles and the scores attached to them are complex and personal though, so it can be difficult to generalize how student loan forgiveness will affect everyone’s scores, says Justin Hakes, vice president of communications for the Consumer Data Industry Association. “Removing or pausing student loan information from credit reports will impact consumers’ credit scores uniquely.”
It largely depends, he says, on how the different credit scoring factors relate to your individual credit history.
Age of Credit History
The longer you’ve had a history of credit, the better. And for many Americans who took on student loans as young adults entering college, those loans may be the oldest accounts on their credit reports.
The age of your credit accounts isn’t the most important factor in your score — it makes up about 15% of your FICO credit score — but it can be affected when your accounts close, especially the oldest ones.
However, the drop is temporary, and paying down your loan in full makes any temporary credit hit well worth it.
Credit mix makes up 10% of your FICO credit score, though it may be the factor most affected by student loan forgiveness.
Student loans (along with other personal loans with regular payments over a given period of time) are a type of installment loan. On your credit report, installment loan accounts differ from revolving accounts, such as a credit card or home equity line of credit (HELOC). In general, it helps your score to have a mix of both installment and revolving account types.
If student loans are the only type of installment loan account on your credit report, closing them could lead to a bigger drop in your credit score. If you do have another installment loan though, like a mortgage, auto loan or personal loan, Harzog says, you won’t see much of a change.
Many borrowers have more student loan debt than the $10,000 forgiveness cap (or $20,000 for qualifying Pell Grant borrowers). Your credit mix is only affected when an account closes. So, if the forgiveness is not enough to close your student loan account, you won’t have to worry about the effect on credit mix until you pay your loans in full.
The credit impact of student loan forgiveness isn’t all negative. In fact, getting thousands of dollars of debt forgiven can improve your score too — increasing your chances of being approved for more types of credit or loans in the future.
That’s because a lower debt balance can improve your debt-to-income ratio (DTI), or the amount of your income that goes toward paying your debt every month. The lower your DTI, the more appealing you will look to a lender, since you have more income available to take on new debt, like a mortgage payment.
How Student Loan Forgiveness Will Not Affect Your Credit
For all the credit factors influenced by student loan forgiveness, there are also some key ways it won’t make a difference.
The Two Most Influential Scoring Factors
Payment history and credit utilization are the most important factors in your credit score — making up a combined 65% of your overall FICO score. For the most part, student loan forgiveness doesn’t have much of an effect on either of these factors.
Payment history looks at your record of making regular payments on all your open accounts on time and in full each month. Missed or late payments are detrimental to your payment history, though. So while it’s not affected by loan forgiveness, it is a good idea to make a plan for any remaining loan payments you’ll still owe ahead of the repayment pause lifting at the start of 2023.
“Pay your bills on time, that’s the most important thing,” Harzog says. “If you still have a student loan to pay off, pay it diligently, pay it on time. That helps to build your credit score and boost it up.”
As for credit utilization — or the ratio of existing debt to your available credit — how that factors into your score is much more reliant on how you use credit cards, Harzog says. Installment accounts aren’t factored into utilization, but you can maintain good credit by keeping credit card balances low.
Past Credit Mistakes
Missing a payment or paying late can have negative consequences on your credit score. If you made a mistake with your student loans in the past and it was reported on your credit, student loan forgiveness will not erase that.
“It will remain there for seven years,” Harzog says. “Everybody makes a mistake now and then … If it’s accurate, you can’t get it off your credit report and you just have to wait it out.”
Those reported mistakes also tend to have less of an impact the further away you are from the date they showed up on your credit report, she says. “Just vow to have great credit habits going forward, and eventually your score will bounce back.”
Keep in mind, this does not apply to the student loan payment pause in response to the pandemic. Those missed payments do not reflect negatively on your score, as long as you begin paying any remaining balance when the pause is lifted next year.
At the end of the day, wiping out a big chunk of student loan debt is well worth the relatively minor — and temporary — effects on your credit score.
“It’s nice for people who qualify. But I don’t think that’s going to suddenly make your score go up or down in any kind of drastic way. And over the next three to six months, it’ll probably all even out anyway.”
The most important thing to great credit is practicing good credit habits consistently over time. Paying your account balances in full and on time each month — while not spending more than you can afford — can help you build and maintain excellent credit.