The Latest Student Loan Forgiveness Problem? It Might Ding Your Credit Score
President Joe Biden’s student loan relief program — which is awaiting a Supreme Court decision later this year — could potentially have a temporary detrimental effect on some borrowers by harming their credit score.
Education expert Mark Kantrowitz told CNBC that since the federal student loan payment pause — set to expire in September — accounts have been reported to the credit bureaus as current.
However, if the Supreme Court sides with Biden’s administration and the relief goes into effect, Kantrowitz told CNBC that along with the wiped out debt, borrowers will also lose out on the positive reporting.
CNBC indicated that given the substantial amount of debt relief, many borrowers would be less concerned about a temporary drop in credit score.
And there’s another factor that could alleviate this temporary drop: Having less debt ultimately helps your rating, analyst Ted Rossman told CNBC. Owing less improves borrowers’ debt-to-income ratio.
“So overall, I see student loan forgiveness as a significant benefit to someone’s overall financial situation, even if their credit score may decline a little bit in the short term,” Rossman told CNBC.
Experts recommended several steps to minimize a drop in credit scores, with the most important one being to make on-time payments and manage debt properly.
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Indeed, payment history — or how you’ve managed your credit accounts — is the most important factor, according to Experian, accounting for 35% of your score.
Ethan Dornhelm, vice president of scores and predictive analytics for FICO, suggested other tips to USA Today, including:
- setting up reminders and automatic payments to not miss payments.
- reading all communications from your student loan provider.
- considering refinancing or consolidating loans.
- contacting your student loan servicer to discuss options.
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