The forgiveness of student loan strategy may result in a drop in credit scores for rare borrowers

April 11, 2023: The Biden administration’s swept plan cancelling to $20,000 in student debt for millions of Americans has an unintended, though hopefully temporary, consequence for many people, experts say.

“For many borrowers, it will result in their credit scores dropping,” increased education expert Mark Kantrowitz said.

Throughout the three-year pause on paying a federal student loan, borrowers’ accounts are being reported to the credit bureaus as current, Kantrowitz said.

Suppose the Supreme Court rules that the plan is legal and can go into effect. In that case, therefore, millions of borrowers will have their student debt balances wiped out entirely and have lost on that positive reporting, Kantrowitz stated.

A temporary decrease in credit score will not matter much to someone getting thousands of dollars in forgiving debts. Also, those who still have a balance following the cancellation don’t see a drop if they pay their bills on time.

And the relief may lower scores a bit; having less debt ultimately helps your pricing, Rossman said. That’s due to owing less improves your debt-to-income ratio, he stated.

Lenders focus on this ratio when talking about how much to let you borrow. Some use the 28/36 rule, which specifies that no over 28% of your monthly appalling income goes toward housing costs, and no more than 36% goes toward total debts.

“So overall, I see student loan forgiveness as a significant benefit to individual’s general financial situation, even if their credit score may decline slightly in the short term,” Rossman said.

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