How Student Loan Forgiveness Can Affect Your Clients’ Credit Score

Many student loan borrowers are overly joyed that Biden’s new student loan forgiveness program can help to reduce their debt load and, in some cases, even wipe it completely out. However, as a lender to these individuals, it’s important that you understand how the student loan forgiveness program will affect their credit scores going into the future.

Student Loan Credit Factor

All national credit bureaus consider student loans a type of installment loan. When it comes to an individual’s credit mix, installment accounts that are for student loans are situated in their own sub-category of installment accounts. Individuals who are granted a higher credit score will have a large mix of different credit categories, including installment credit, revolving credit, and even mortgage loans.

When individuals have a large mix of all different types of credit, it helps to show that they can manage different obligations in a successful manner. However, when individuals only have a certain type of credit, such as revolving credit and no installment loans, it can show that they’re not yet able to handle different types of credit.

How Forgiveness Will Affect Credit Mix

As part of Biden’s student loan forgiveness program, some borrowers will qualify for up to $20,000 worth of loan forgiveness, while others may qualify for up to $10,000 worth. How forgiveness affects a person’s credit score will highly depend on the amount of debt that they have out.

For example, let’s say one student borrower has $10,000 in student debt. Under the forgiveness program, all of their student debt will be paid off. This means that their student loan accounts will be closed and marked that they were paid. This type of borrower may see a slight ding to their credit score because they no longer have student loans in their credit mix.

Borrowers who have other installment loans currently on their credit score are going to see less of a drop in their credit score. This is because these borrowers will still have installment loans that weigh into their credit mix rating.

In a different example, let’s say that a student has $15,000 in student loan debt. If they’re only given $10,000 in forgiveness under Biden’s student loan forgiveness program, those still owe $5,000 in student loan debt.

For this type of individual, their credit score isn’t going to decrease because their account isn’t being closed because the loan isn’t being paid off in full. In fact, this type of borrower may actually see an increase in their credit score since they have a lower balance due on their student loan installment.

Have questions?  Speak to a Private Eyes expert for more information.