As the student loan debt crisis continues to escalate in the U.S., calls for student loan forgiveness have grown louder. While student loan forgiveness could bring significant relief to millions of borrowers struggling to make ends meet, it may come with unintended consequences, including a negative impact on your credit score.
How is your credit score calculated?
Credit scores are calculated using a variety of factors in order to determine an individual’s creditworthiness, including:
- payment history: how consistently an individual pays their bills on time
- credit utilization: how much of their available credit they use
- length of credit history: the average age of their open accounts
- types of credit used: installment loans, revolving lines of credit, etc.
- new credit: applications for additional lines of credit
All these factors combine to create a three-digit number that helps lenders and creditors understand the likelihood of repayment. It is important to stay up to date with your payments as well as monitor your credit report regularly in order to maintain a good score. If you’re struggling with achieving your desired score, consider a loan.
One loan to consider is a credit builder loan. What is a credit builder loan? It’s a type of loan specifically designed to help consumers build or rebuild their credit score. It typically involves the borrower putting down a deposit, which acts as collateral for the loan, and then making regular payments over a set period of time. The payments will be reported to the credit bureaus, and this can help boost the borrower’s credit score if they make their payments on time.
How could loan forgiveness actually hurt your score?
Unfortunately, if your student loans are forgiven, your payment history may disappear from your credit report. This could make it harder for lenders to assess your creditworthiness and may result in a lower credit score. If your student loan account is in good standing, and the forgiveness offered is enough to wipe your account clean, you could notice a temporary drop in your score.
However, many people might not see a drop at all, and could even see an increase. Forgiveness will decrease the total amount of money you owe, which is a good thing for your score. If you do see a temporary drop, it shouldn’t be more than 20 points.
If you’re struggling with student loan debt, you might be wondering, “why is my credit score not going up?” There could be several reasons. First, if you’re making late or missed payments, this can negatively impact your score. Additionally, if you’re carrying a high balance on your credit cards or have other outstanding debts, this can also drag down your score.
The status of student loan forgiveness in the U.S.
The U.S. Supreme Court heard the arguments on whether President Biden is legally allowed to cancel $10,000 in student debt per borrower, and up to $20,000 per Pell Grant recipient. The Supreme Court has not made a decision on the case, but payments will begin 60 days after a decision is announced. If they haven’t announced a decision by June 30, 2023, payments will begin 60 days after that. So, at the latest, you can expect to resume payments on student loans by August 29 at the latest.
Student loan forgiveness could potentially hurt your credit score by erasing your payment history and preventing you from building credit through on-time payments. If you’re struggling with student loan debt, consider exploring other options, such as income-driven repayment plans, deferment, or forbearance, that can help you manage your debt while still building your credit score.