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What can loan forgiveness mean for your credit score?

Student loan debt
Posted at 5:08 AM, Aug 29, 2022
and last updated 2022-08-29 05:26:58-04

With President Joe Biden announcing his student loan debt forgiveness plan, many borrowers may wonder how this will impact their credit score.

An 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 in student debt to be forgiven. An opportunity if done wisely can make your credit shine.

"It’s not money in your pocket today but it’s $10,000 less than what you owe," said Victor Claar, economic professor at FGCU.

Claar said the impact of student loan forgiveness could be great for a person's personal finances.

”For your typical American who is a college graduate, they hold debt somewhere in the neighborhood of the price of a new car. Somewhere in the mid $20,000s and low $30,000 range," Claar said.

The president's student loan relief plan is aiming to knock off at least $10,000 of that debt for borrowers who are earning less than $125,000 a year. According to Measure one, an academic data firm, 92 percent of student debt are federal loans.

“A lot of people are questioning 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 will this have on a borrower's credit score. reports loan forgiveness can impact you credit score. In fact, it can cause it to dip for a short period of time. Because federal student loans are installment loans and your credit score benefits from having diversified such as student loans and car loans— if that installment loan is closed it can cause a temporary drop in a credit score.

Claar said that's also the case if you decide to use that money saved, to close a credit card.

"When you look at your credit score there are several factors that are in there – how long your history – ironically if you cancel credit cards you don’t need it can make your credit score go down because they are looking at your history," Claar said. "For most people, the best thing you can do where your credit score is concerned is paying your bills on time — especially if you can afford to pay in full come or come in close every time, it’s great for your credit score and reduces the amount of interest that you pay."