Here’s What Student Loan Forgiveness Means for Your Credit Score
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If you’ve had your student loans forgiven — congratulations. It could be a big weight off your shoulders. If you’re still on a path toward forgiveness, keep up the good work, and you too could clear away your student loan debts.
When lenders forgive your student loans, they wipe away the remainder of your debt. Although there could be some expensive tax consequences, getting debts forgiven will almost certainly benefit your overall finances.
The impact of student loan forgiveness on your credit score isn’t necessarily so straightforward, however. It could depend on when and why the loans were forgiven, and your overall credit profile. Generally speaking, debt forgiven on accounts with a positive history on your credit reports will help your credit score. On the other hand, closed accounts with negative marks could hurt your score, even after the loan is forgiven.
How does student loan forgiveness affect your credit?
Student loans can affect your credit in positive or negative ways while you’re in the midst of repaying the loans.
Making on-time payments could help you build a positive credit history and raise your scores. However, missing a payment and having a loan go into default or be sent to collections could lower your scores.
Once your loans are forgiven, several things could happen:
- If you’d made payments before your loan was forgiven, the lender or loan servicer could tell the credit bureaus that your loan has been paid in full and is now closed.
- If you were never required to make loan payments before the loan was forgiven, the account may be deleted from your credit reports.
- If your loan was forgiven or discharged due to a school closure, or a school falsely certifying you as eligible for federal student loans, the account may be deleted from your credit reports even if you had started making payments already.
If an account is deleted from your credit reports, it will no longer show up when you review your credit reports and won’t impact your credit score. When you check your credit score, you might notice your score increases or decreases depending on the other information that’s left in your credit reports.
For example, student loans are installments loans, similar to personal, auto or mortgage loans. Having a mix of installment loans and revolving accounts, such as credit cards, in your credit history could increase your credit scores. If the forgiven student loan was your only installment account, the deletion might lead to a lower credit score.
Accounts that are closed and remain on your credit reports can still impact your credit scores. The forgiven student loan accounts could stay on your reports for up to 10 years:
- If you always made on-time payments before the student loan was forgiven, the account will stay on your credit reports for 10 years after it’s closed.
- If you missed payments, the account will be removed from your credit reports seven years after the first missed payment in the account’s history.
- Your account may have already been sent to collection, in which case it will be updated to a paid-in-full collection account once the loan is forgiven. It won’t be removed until seven years after the original late payment that led to the account being sent to collection.
Federal student loan forgiveness programs
Several federal programs could lead to your federal student loans being forgiven, canceled or discharged.
- Public Service Loan Forgiveness (PSLF) program: An option for those who make 120 monthly payments while working full time at a qualified employer, such as a government agency or nonprofit. After you’ve completed your 120th payment, the remainder of the loan could be forgiven. Figuring out which loans are eligible and tracking your progress can be difficult, though.
- Income-driven repayment plans: If you’re repaying a federal student loan with an income-driven repayment plan (which ties your payment amount to your income), the remainder of the loan’s balance could be forgiven after 20 to 25 years.
- Teacher loan forgiveness: Full-time teachers who work in an eligible low-income school or educational service agency for five years may be able to have up to $17,500 in federal student loans forgiven.
- Closed school discharge: If your school closed and you weren’t able to complete your degree or program, you may be able to have the loans you took out to pay for the school discharged.
- Total and permanent disability (TPD) discharge: If you become physically or mentally disabled, you may be able to submit a TPD discharge application and have the remainder of your federal student loans discharged. You must meet specific criteria, such as having a physician’s certification that your disability could result in death or is expected to continue for at least five years.
LendingTree has a complete guide to student loan forgiveness programs, which includes additional federal programs and profession-specific options, such as loan forgiveness for nurses.
Most programs only apply to federal student loans. However, if you have a private student loan, you may still be eligible for other federal, state, employer and profession-specific forgiveness or repayment assistance programs.
The tax implications of student loan forgiveness
While student loan forgiveness can instantly wipe out thousands of dollars in debt, it can also lead to a fairly large tax bill.
You won’t have to pay taxes on the forgiven amount if your loans are forgiven or discharged using the following programs:
- Public Service Loan Forgiveness (PSLF)
- Student Loan Forgiveness for Teachers
- Some health service-related student loan forgiveness programs
- Total and permanent disability (TPD) discharge
Otherwise, the forgiven or discharged amount could be included in your income for the year, which means you may have to pay income taxes on the money.
For example, if you have $10,000 in debt discharged, you might wind up owing an extra several thousand dollars in taxes. You may be able to get on an installment payment plan with the IRS, in which case you’ll be back to making monthly payments. It’s still good news overall, as you’ve wiped out most of your debt. But a bill from Uncle Sam can take some joy out of the forgiveness process.
Moving forward and building credit
Whether your forgiven student loans are helping or hurting your credit, they’re now part of your credit history. And, in either case, the impact they have on your credit score will diminish over time.
Learning how to build good credit going forward will be important if you want to get, or maintain, an excellent credit score.
The most important things you can do are:
- Open a new account if your student loan was your only credit account.
- Have accounts that report to the credit bureaus and pay your bills on time.
- Only use a small portion of your available credit limit on credit cards and lines of credit.
- Don’t open a lot of accounts at once.
A long credit history can also help your scores, so it may be a matter of waiting. Fortunately, with less debt hanging over your head, it will be easier to manage your bills and build good credit.