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President Joe Biden is expected to make an announcement this summer on whether to pursue legislation that would forgive federal student loan debt for millions of borrowers. If a forgiveness plan is adopted, individual borrowers could see their overall debt load reduced by thousands of dollars.
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Normally, this would be good news in terms of your credit score because it removes significant debt from your credit profile – and paying off debt is an effective way to boost your credit score. But eliminating student debt through loan forgiveness might not move the needle much. In some cases, it could even hurt your score.
According to Martin Lynch, director of education at Cambridge Credit Counselling, borrowers who have made student loan repayments on time and get the full amount of their loans forgiven could see a small boost in their credit scores. But the scores of many student borrowers will not be significantly affected.
How could student loan forgiveness hurt a credit score? This can happen if a student loan was in default when it was canceled and the borrower’s credit score is under older FICO models that still include paid collection accounts, Lynch told CNET. This would not be the case with the new FICO scoring models which ignore paid collection accounts.
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Borrowers with thin credit profiles that feature few credit accounts and little account diversity could also see their credit scores plummet if student loans are forgiven. The same could happen if student loans are among the oldest accounts, Lynch said, because removing them would change the average age of all credit accounts.
Regardless of the impact on your credit score, you’re probably better off accepting federal student loan forgiveness than ignoring it.
“Having thousands of dollars of debt forgiven will be more important to most student loan holders,” Lynch said.
This is especially true in times of high inflation, when dollars don’t have as much purchasing power as normal. If you want to improve your credit score, Lynch recommends using any money you save on student loan forgiveness to pay off balances on revolving credit accounts such as credit cards.
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