President Biden’s loan forgiveness plan is still under court review, but if it comes to fruition, you may wonder how it will affect your credit. Loan forgiveness won’t remove your accounts from your credit report. Instead, the accounts will show up as paid in full and your debt-to-income (DTI) ratio will improve.
If you’re in default on federal loans, Biden’s Fresh Start program can potentially remove the default from your credit reports, and your defaulted loans would show up as “in repayment.”
You can also remove inaccuracies related to your student loan to improve your credit. However, for other situations in which your credit history with student loans damage your credit, you likely can’t remove them if the information is accurate.
Learn more about how student loan forgiveness can affect your credit.
- With student loan forgiveness, your debt’s history remains on your credit report in most cases.
- Loan forgiveness programs include Public Service Loan Forgiveness and Teacher Loan Forgiveness.
- President Biden’s proposed student loan forgiveness program would provide one-time forgiveness of $10,000 ($20,000 for Pell Grant recipients).
- Loan forgiveness could have a small impact on credit scores, but the effect would likely be temporary.
How Defaulted Student Loans Affect Your Credit
Not paying your student loans can lead to default, which can significantly damage your credit. With private loans, you can enter default after missing a payment for 90 days, and with federal loans, you enter default after 270 days.
The consequences of default can be severe, particularly with federal student loans. Under normal circumstances, the federal government can garnish your wages and seize your tax refund and other benefits. The default is reported to the credit bureaus, and the record of late payments will likely stay on your credit reports for up to seven years.
What Is Student Loan Forgiveness?
There are several types of student loan forgiveness programs that apply only to federal student loans. The most common forms include:
- Public Service Loan Forgiveness (PSLF): Under PSLF, federal loan borrowers can qualify for loan forgiveness if they work full time for a nonprofit organization or government agency for at least 10 years and make 120 qualifying monthly payments.
- Teacher Loan Forgiveness: Teachers in low-income schools or education service agencies for at least five full and consecutive academic years can qualify for up to $17,500 of loan forgiveness for their federal loans.
- Income-Driven Repayment (IDR) Forgiveness: With IDR plans, borrowers may qualify for reduced payment based on their discretionary incomes. And if the borrower still has a balance at the end of the repayment term, the remainder is forgiven. These plans are also known as Long-term Forgiveness and can take 20-25 years depending on whether the loan was for an undergraduate or graduate school loan.
In August 2022, President Biden announced the launch of a new, one-time loan forgiveness program. Under the terms of the plan, borrowers can qualify for up to $10,000 of loan forgiveness (borrowers who received Pell Grants can qualify for up to $20,000 of loan forgiveness). Currently, the plan is blocked by litigation and is awaiting a U.S. Supreme Court ruling.
To qualify for loan forgiveness, borrowers must earn less than $125,000 per year (or $250,000 if they are married and file a joint return).
What Is the Fresh Start Program?
Biden’s student loan relief plan attracted attention for its loan forgiveness provisions. But another provision could also be helpful to millions of borrowers: the Fresh Start program.
Under this program, borrowers with federal student loans in default could drastically improve their credit. When repayment begins, defaulted student loans would be removed from the credit report, and the loans would appear on a credit report as “in repayment.”
Borrowers must contact their student loan servicers to take advantage of the Fresh Start program.
Loan Forgiveness and Private Student Loans
Biden’s loan forgiveness program only applies to federal student loans. Private student loans aren’t eligible for forgiveness.
If you have private student loans in default, the only way to remove the default is to pay the accounts off in full, even if the loans are forgiven. If you have a creditworthy co-signer willing to co-sign a loan with you, one way to pay off the loans and improve your credit is to refinance the loans with another lender.
How Does Student Loan Forgiveness Affect Your Credit Score?
Whether you qualify for Public Service Loan Forgiveness (PSLF) or hope to take advantage of Biden’s new student loan relief program, there may be some impact to your credit. Student loan forgiveness can affect your credit in the following ways:
- Defaulted loans: Under the terms of the Fresh Start program, defaulted student loans are removed from credit reports, and the loans are listed as “in repayment.”
- Credit mix: If you qualify for loan forgiveness and your loans are paid off, your score may drop by a few points, particularly if your student loan was your only installment loan. That’s because your credit mix, which shows you can handle multiple forms of credit, accounts for 10% of your FICO Score.
- Age of credit: The length of your credit history makes up 15% of your credit score. If your student loan was your oldest account, paying it off can cause your score to decrease.
- Debt-to-income (DTI) ratio: When you qualify for loan forgiveness and your loan is eliminated, you have one less monthly payment to make. That means you have a better debt-to-income (DTI) ratio than you did before, making it easier to qualify for other loans or credit cards.
Student loan forgiveness could cause your score to drop initially. But the effect should be relatively small, and if you make the payments on your other credit accounts on time, then your score should recover quickly.
How to Remove Student Loans from Your Credit Report
If you want to remove loans from credit reports, you should know that accurate information cannot be removed. But if there are errors on your credit report, you can dispute those inaccuracies and have them removed. If there are accounts that are past due that don’t belong to you, removing them could improve your credit.
You can file a dispute with the major credit bureaus online:
You should also send a dispute letter to your loan servicer. The letter should include the name and account information of the loan with inaccuracies, and details about why it should be removed. If you have supporting documentation, such as a statement showing the loan was paid in full or a police report after your identity was stolen, include copies of that information.
You can download a sample letter to remove any inaccurate student loan information from credit reports from the Consumer Financial Protection Bureau (CFPB).
Do student loans go away after seven years?
With some forms of debt, there are statutes of limitations. A creditor has a specific period of time to sue you for the money owed. After that period, the statute of limitations is met, and you are no longer legally liable for the debt.
Statutes of limitations are generally three to six years in length.
However, student loans work differently from other forms of debt. Statutes of limitations don’t apply to federal student loans, so they never go away. And if you miss payments, those negative marks will stay on your credit report for seven years.
How do I know if my student loans were forgiven?
Student loan forgiveness isn’t automatic. If you receive a phone call or letter out of the blue that says your loans were forgiven, it’s likely a scam.
To qualify for loan forgiveness, you would have to apply through a program like Public Service Loan Forgiveness (PSLF) or Teacher Loan Forgiveness. The requirements are strict, so you’d only qualify for forgiveness if you met the program criteria and completed the necessary service requirements, which can take several years.
If your application for loan forgiveness is approved, you’ll receive a notification from your loan servicer. In the case of President Biden’s loan forgiveness program, it is currently on hold as litigation unfolds. No loan forgiveness has been granted through that program.
How do I find out what student loans I have?
To determine student loan information and status borrowers can go to the Federal Student Aid website and login at StudentAid.gov/aid-summary to view their student aid dashboard and history.
It’s also not uncommon for student loans to change servicer providers. Company servicing contracts often end, and the loans are transferred to new companies. If you don’t have your updated address registered with your loan servicer, you may not receive a notification of the change.
To find out what loan servicer is managing your loans, you can contact the Federal Student Aid Information Center at 1-800-433-3243 or view your credit report at AnnualCreditReport.com.
The Bottom Line
Although loan forgiveness can impact your credit score, the effect is small and temporary. And for borrowers with federal student loans in default, the Fresh Start program could give them a clean slate, removing the default from their credit reports. To take advantage of the program, sign up online at myeddebt.ed.gov or call 1-800-621-3115.