Last month, the White House announced a sweeping plan to forgive the student loan debt of millions of Americans, canceling up to $10,000 of debt for some borrowers and $20,000 for those who have received Pell Grants. If you have student loans, they affect your credit score no matter what (they are ready, after all). And for the millions eligible for student loan forgiveness, this upcoming change in your loan status will cause your credit score to change, potentially for the worse, if only for a little while. Here’s what to know about the impact student loan forgiveness could have your credit score.
Your credit score could drop, at least in the short term
Student loans help your credit combinationwhich refers to the variety of loans you have (such as a car, mortgage, etc.). How you manage your credit mix impacts your overall score, and lenders like to see your ability to handle different types of loans at the same time. Student loan forgiveness takes away your credit, which could cause your credit score to drop slightly.
Another reason why canceling a student loan could lead to a minor drop in your credit score is that it could reduce the average age of your credit accounts, since student loans are often among the first loans you people contract.
Ultimately, none of this is alarming – your credit score would only see a drop of 5 to 10 points, according to CNBC. And like Money.com explains it, as long as you continue to make your other loan payments on time, your credit score can rebound quite quickly. It may be important for you to keep in mind a temporary drop in the immediate future, but it probably won’t affect your ability to get long-term loans.
The bottom line: Loan forgiveness is worth it
A rapid drop in your credit score shouldn’t deter anyone from applying for a loan forgiveness. A few lost credit points are insignificant compared to the importance of eliminating debt. Keep in mind that even if your loans should disappear from your credit report, you are still responsible for paying them—so if you stare at your debt and think, well, fuck himthen you should Lily what exactly happens if you just 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 are looking for a new car or a new house, consider getting pre-approved as soon as possible so that your credit score is as high as possible when you to apply. The the student loan forgiveness application doesn’t even open until early October, so changes to your credit score will happen long after that.