Last month, the White House announced a sweeping plan to forgive the student loan debt of millions of Americans, canceling up to $10,000 in debt for some borrowers and $20,000 for those who received Pell Grants. If you took out student loans, they have an effect on your credit score no matter what (they are loans, after all). And for the millions eligible for student loan forgiveness, this upcoming change to your loan status will lead to changes to your credit score, potentially for the worse—if only for a little bit. Here’s what to know about how student loan forgiveness might impact your credit score.
Your credit score might fall—at least in the short term
Student loans contribute to your credit mix, which refers to the variety of loans you have (like a car, mortgage, etc.). How well you manage your credit mix impacts your overall score, and lenders like to see your ability to manage different types of loans at the same time. Student loan forgiveness takes away from your credit mix, which could result in a slight ding to your credit score.
Another reason student loan forgiveness could cause a minor hit your credit score is that it might lower the average age of your credit accounts, since student loans are often some the earliest loans people take out.
Ultimately, none of this is cause for alarm—your credit score would only see a 5- to 10-point drop, according to CNBC. And as Money.com explains it, as long as you keep making your other loan payments on time, your credit score can rebound relatively quickly. Perhaps a temporary dip is important for you to keep in mind for the immediate future, but it probably won’t affect your ability secure loans in the long term.
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The bottom line: Loan forgiveness is worth it
A quick dip in your credit score should not deter anyone from seeking loan forgiveness. A few lost credit points are insignificant compared to the importance of eliminating debt. Keep in mind that even if your loans were to vanish from your credit report, you’re still responsible for paying them—so if you’re staring at your debt and thinking, well, fuck it, then you should read what exactly happens if you simply ignore your student loans.
The only other thing to consider right now is how your credit score factors into any plans to borrow money or finance a major purchase. If you’re in the market for a new car or home, look into getting pre-approved ASAP so that your credit score is as high as possible when you apply. The student loan cancellation application doesn’t even open up until early October, so changes to your credit score will happen well after that.