With President Joe Biden announcing his student loan forgiveness plan, many borrowers may be wondering how this will affect their credit score.
Economist and professor at Florida Gulf Coast University (FGCU). He said there is an opportunity if you are one of the 20 million Americans who have thousands of student debts to be forgiven. An opportunity, if done wisely, can make your credit shine.
“Today it’s not money in your pocket, but it’s $10,000 less than you owe,” said Victor Claar, an economics professor at FGCU.
Claar said the impact of student loan forgiveness could be great for a person’s personal finances.
“The typical American college graduate has debt close to the price of a new car. Somewhere in the mid-$20,000 range and under $30,000,” Claar said.
The president’s student loan relief plan aims to eliminate at least $10,000 of that debt for borrowers making less than $125,000 a year. According to Measure One, an academic data firm, 92 percent of student debt is federal loans.
“A lot of people are wondering whether or not it’s appropriate to have a bailout for college graduates,” Claar said.
That’s not the only question, some may wonder what impact this will have on a borrower’s credit score. Creditrepair.com advises that loan forgiveness can affect your credit score. In fact, you can make it submerge for a short period of time. Because federal student loans are installment loans and your credit score benefits from being diversified, like student loans and car loans, if that installment loan closes, it can cause a temporary drop in your credit score.
Claar said that’s also the case if you decide to use that saved money to close a credit card.
“When you look at your credit score, there are a number of factors that are there: how long your history is; ironically, if you cancel credit cards you don’t need, it can cause your credit score to go down because they’re looking at your history.” Clair said. “For most people, the best thing you can do when it comes to your credit score is to pay your bills on time, especially if you can pay the full payment, come or go every time, it’s great for your credit score.” and reduces the amount of interest you pay.