Student loan repayment could affect your credit score
Federal student loan borrowers everywhere are happy to have some or all of their debt forgiven.
But it could have what experts call a temporary negative effect on personal finances.
This is because repayment of a loan is a blessing and a slight curse. You’re closer to being debt free, which also hurts your credit score.
But still, the announcement brings hope to many people struggling with student loans.
“A weight has been lifted off my shoulders, mainly for my parents because it stresses them out, like a lot of them,” said Moniest Cardell, a student borrower.
Cardell can see up to $20,000 of his debt disappear as long as he earns less than $125,000 a year.
“The cancellation should clear the balance of about 20 million borrowers, that is, the White House,” said Anna Helhoski, student loan expert at NerdWallet. “The White House also estimates that 95% of all federal student loan borrowers will benefit in some way from this cancellation.”
With every action, comes an equal opposite reaction.
Anytime you pay off a loan, whether it’s your car or your home loans, you’ll see your credit score drop.
Student loan repayment is no exception.
Nerdwallet credit card expert Sara Rathner says getting rid of that long-term installment loan affects how old your accounts are on your credit score as well as your credit mix.
“It can feel a bit like punishment for doing the right thing when you pay off a loan and then you see your credit score go down. But that’s a short-term problem,” Rathner said. “In the long run, it’s better for you to have that debt out of your life, because it frees up your money to do all those other things that you want or need to do.”
Plus, your income to debt ratio goes down.
And there are ways to get your score back, like paying your bills on time each month and seeing if your credit card company will give you a credit limit increase.
If you can afford it, consider getting another card.
“It’s not an invitation to spend more money just because you have a higher credit limit,” Rathner said. “If you have this higher limit, but you keep your spending the same or even reduce it, then you reduce the use of credit.”
Which leads to increasing your score and getting you closer to other financial goals.
“There’s no greater freedom than paying off a huge loan and receiving notification that you’re done. And it may affect your credit score temporarily, but it’s temporary and your debt repayment is forever,” Rathner said.
If you paid thousands of dollars in student loans during the pandemic, the Federal Student Aid website said you can get your money back.
Contact your service provider for a refund.
For more information, visit the Federal Student Aid website.