Why Student Loan Forgiveness Could Hurt Your Credit Score
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The Biden Administration’s new student forgiveness plan promises relief for about 30 million borrowers. While this is obviously great news for borrowers, changes to their student loans could also mean a change — quite possibly a temporary decrease — to their credit scores.
The impact is likely to be minor for most people, but it will depend on the individual situation.
Here's everything you need to know.
Your credit mix will change
This second iteration of the forgiveness plan, while less ambitious than the first, could still wipe out debt for millions, and could forgive balances owed by those who have been paying for loans for 20 years or more.
If you're one of those borrowers, you might see your credit score fall a little bit — at least in the short term and especially if you don’t have other kinds of debt.
That's because student loans contribute to what's known as your credit mix. Your credit mix refers to the different types of loans you have, from revolving debt like credit cards to installment debt like student loans, car loans and mortgages. Lenders like to see a variety of credit types, and eliminating one type from your profile could have a negative impact on your score.
Your credit mix only accounts for 10% of your FICO score, which is one type of credit score that lenders use to assess your creditworthiness (VantageScore is another major score lenders use).
Any drop in your score due to a change in your credit mix should be minimal and probably won't make or break you when it comes to securing new loans down the line. The likelihood of a slight dip in your credit score is worth keeping in mind, however, if you're planning to finance a major purchase like a house or a car in the immediate future.
Your credit history could get shorter
The other element that might lower your score is a change in the average age of your credit accounts. Student loans are often one of the oldest loans Americans have, since most people take them out when they're still teenagers.
Closing those longstanding loans could be bad for your credit score since lenders tend to prefer borrowers with longer credit histories. The length of your credit history accounts for 15% of your FICO score.
The good news is that as long as you keep making your other loan payments on time, your credit score can rebound relatively quickly, and in all likelihood the temporary hit to your score won't outweigh the benefits of eliminating the debt.
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