A student loan forgiveness program can help if you are overwhelmed by repaying federal student loans. But how does this impact your credit? While forgiving a student loan generally shouldn’t hurt your credit, previous missed payments can be reported by your loan servicer and appear on your credit report. Here is a general look at how your credit can be affected if you qualify for student loan forgiveness.
What Is Student Loan Forgiveness?
This is the process of discharging student loan debt, regardless of the loans’ status. If you meet certain requirements, the balance you still owe can be effectively canceled. This doesn’t hurt your credit in the same way that debt settlement or bankruptcy do. The process only applies to student loans issued by the federal government, in regard to programs such as:
Public Service Student Loan Forgiveness
A program that helps college graduates who work for a government agency or eligible nonprofit and are on an income-driven repayment plan (requires 120 monthly payments). It applies to those working full-time for a federal, state, local, or tribal government.
Teacher Loan Forgiveness Program (for Direct, or Federal Stafford Loans)
Is based on the subject area you teach and requires you be employed full-time, for at least five years, at an elementary or secondary school or educational service provider serving low-income students. You must have state certification to teach and have at least a bachelor’s degree.
Income-Driven Repayment Plans
Federal student loan borrowers can qualify for these programs. Monthly payments can be reduced to 10% to 20% of your discretionary income regardless of the plan. Repayment terms can be extended to 20 or 25 years, and remaining balances forgiven thereafter.
What Does This Do to My Credit?
Student loan forgiveness should not make a significant difference in your credit score. However, if your account was in poor standing prior to the discharge, your score can still drop. A zero balance as a result of a discharge does not erase negative information in your credit history. Details of your payment history remain on your credit report for seven years, and payment history has the biggest influence on your credit score.
Having student loans forgiven can also lower your debt utilization. Reduced debt means you have more credit available and greater financial flexibility. This can increase your credit score. However, having large amounts of credit card debt can work against you. Being an installment loan, a student loan is looked upon more favorably (it’s association with higher education and greater earning potential is considered), rather than the burden credit card debt is generally seen as. The perks of loan forgiveness therefore vary depending on your personal situation.
Also, the amount forgiven can be seen as a tax liability, as it’s counted as additional personal income. Owing taxes doesn’t affect your credit score, but if you can’t cover your tax bill (i.e., pay it with a credit card or loan, or don’t pay it), you could find yourself with a tax lien or wage garnishment, which will appear on your credit report.
Concerned About Negative Information on Your Credit Report?
American Credit can help if you want to improve your credit score and have negative information on your credit report. You can dispute information directly with the credit bureaus. But oftentimes, the process isn’t effective. We employ a pre-litigation method to achieve a higher success rate. Reducing the impact of student loan forgiveness requires improving your credit. We can help; call 855-274-1732
for your free credit consultation.