California; Hayward — For a number of months, there have been many roadblocks as well as many moments of progress for student loan debt relief. As part of a campaign promise, the Biden administration has placed significant emphasis on Student Debt Forgiveness, considering it a top priority. While there have been attempts to pass legislation for the forgiveness of federal student loan debts for those in need, the Supreme Court recently rejected Biden’s plan.
According to Marca, the prospect of clearing federal student loan debt might appear advantageous for one's credit score since repaying debts reflects positively on an individual's sense of responsibility. Credit scores are highly influenced by income to debt ratios, which would make one think that there would be mainly positive effects of credit scores post-debt relief.
However, according to various news outlets, the situation may not be as straightforward as it seems.
If borrowers who relied on student loan payments to finance their education and have consistently made timely payments are included in the proposed loan forgiveness program and subsequently cleared of their debts, it could potentially improve their credit score to some extent. They would potentially be able to "move the needle a little" and achieve a better credit score.
Conversely, those individuals who initially began repaying their debts but subsequently stopped may find themselves in a predicament that negatively impacts their overall credit score. Moreover, those with limited credit history or a lack of diversity in their accounts could also be affected by the forgiveness program.
Martin Lynch, the director of education at Cambridge Credit Counseling, cautions that under certain circumstances, the cancellation of a defaulted student loan and the borrower's credit score, assessed using older FICO models that still consider paid collection accounts, could coincide. Lynch shared this insight with CNET.
Nevertheless, at present, the potential impact on credit scores should be considered a secondary concern. If the federal student loan forgiveness plan is implemented, the primary focus should be on resolving one's debt rather than worrying about the impact on individual credit scores.
Noumaan Faiz, (he/him) is a journalist and entertainer from Hayward, CA who covers culture and entertainment.
Edited by Nykeya Woods