President Joe Biden is expected to make an announcement this summer on whether to pursue legislation that would forgive federal student loan debts for millions of borrowers. If a forgiveness plan is passed, individual borrowers could see their overall debt loads reduced by thousands of dollars.
Normally, this would be good news in terms of credit scores because it removes significant debt from your credit profile — and paying down debt is an effective way to boost your credit score. But eliminating student debt through loan forgiveness might not move the needle that much. In some cases, it might even hurt your score.
Borrowers who made student loan payments on time and who get the full amount of their loans forgiven could see a slight bump in their credit scores, according to Martin Lynch, director of education at Cambridge Credit Counseling. But the scores for many student-loan borrowers won’t be dramatically impacted.
How could student loan forgiveness hurt a credit score? This might happen if a student loan was in default when it was canceled and the borrower’s credit score is under older FICO models that still include paid collection accounts, Lynch told CNET. That wouldn’t be the case with newer FICO scoring models that ignore paid collection accounts.
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Borrowers with thin credit profiles that feature few credit accounts and little account diversity could also see their credit scores drop if student loans are canceled. The same might happen if student loans are among the oldest accounts, Lynch said, because removing them would change the average age on all credit accounts.
No matter how your credit score might be impacted, you’re probably better off accepting federal student loan forgiveness than skipping it.
“Having thousands of dollars of debt forgiven is going to be more important for most student loan holders,” Lynch said.
This is especially true in a period of high inflation, when dollars don’t have nearly as much buying power as normal. If you want to improve your credit score, Lynch recommends using any money you save on student loan forgiveness to pay down balances on revolving credit accounts such as credit cards.
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