Credit Repair and Student Loan Forgiveness
Student loans are the fastest growing source of debt in the United States. More people than ever are going to college, and the cost of college has soared to record levels. This has created a situation where the only way that college is an option for many people is to take out student loans.
However, recent economic troubles, combined with the high cost of college and other factors, mean that more people are having problems paying student loans on time. One strategy that many people use is to use programs and offers to obtain student loan forgiveness.
Moreover, credit repair experts are recommending student loan forgiveness strategies with increasing frequency. This isn’t surprising, as the benefits of having your student loans forgiven can be tremendous. However, there are important interactions between your student loans and your credit score that need to be accounted for so that you can be fully prepared for the future.
What is Student Loan Forgiveness?
Student loan forgiveness is just what it sounds like; your lender counts your loans as repaid once you complete a student loan forgiveness program. That means you no longer have to pay your student loans, and your credit report shows that you don’t owe that money anymore. As a result, student loan forgiveness can be a tremendous boon to people who are trying to get the financial situation on firmer ground. However, student loans influence a number of factors for your credit score, and it’s important to understand and consider these factors before you go through the process of having your student loans forgiven.
Understanding how student loans affect your credit is important for several reasons. First, the amount of money tied up in student loans is huge. Therefore, having the loans forgiven can have huge effects on your financial situation. Moreover, the programs that offer student loan forgiveness are very time consuming, often requiring five or more years of service. Therefore, it’s important to understand what you’re getting into before you sign away years of your life to get your student loans forgiven.
How Does Student Loan Forgiveness Affect Credit Scores?
Student loans interact with your credit score in a number of different ways. They help make up the overall profile of your debt. Generally, credit reporting agencies view student loans favorably because they are an investment in the future. The type of debt you have helps influence your overall credit score. While all debt needs to be repaid on time to prevent a drop in your score, it’s much better to have debts like student loans and mortgages than it is to have things like credit card debt.
Student loans are classified as installment debt, whereas credit cards are considered to be revolving debt. Revolving debt is just a burden, whereas installment debt is an investment in the future that will produce higher earnings.
Lower Debt Utilization
The biggest advantage that student loan forgiveness offers for borrowers is that you’ll have the balance removed from your credit score. This lowers the overall amount of debt you carry, and has a huge impact on your score.
One of the primary factors in your credit score is your debt-to-income ratio. This ratio reflects how much debt you have versus how much money you bring in. The more debt you obtain without an increase in your earnings, the worse this ratio would be. As a result, lenders will view you as a greater risk for default because they will fear that you aren’t making enough money to cover new debts. The result is higher interest rates on your loans and lines of credit and a lower credit score overall.
Payment History Stays on Records
One of the reasons why student loan forgiveness is such an attractive option is because so many people are having a hard time paying their student loans on time. Having these loans forgiven saves consumers a tremendous amount of money each month.
However, there is a popular misconception that student loan forgiveness completely clears any history of your student loan debt. This is not the case. You’ll still have the student loan on your credit report, but it will be listed as having been paid in full.
One result of this situation is that a record of your student loan payments stays on your credit report. This information stays for seven years, just like with any other kind of debt. Therefore, student loan forgiveness does not remove any entry or record of late or missed payments that your student loan servicer may have submitted. As a result, student loan forgiveness will not improve your record of on-time payments, nor will it erase past mistakes or problems.
Be Wary of Taxes
The final thing you should consider when seeking student loan forgiveness is that, in most situations, having a loan forgiven counts as income for tax purposes. This can come as a shock for many people. For example, if you have $20,000 of student loans forgiven, your income according to the IRS will be $20,000 more than you actually made. Moreover, unlike wages, you haven’t been paying taxes on this income through the course of the year. As a result, you can find yourself owing a huge quantity of money to the IRS. Failure to pay these taxes can directly affect your credit score and history, and put you in an even worse credit situation than you were in before.
Credit Repair and Student Loans
A credit repair expert can help you understand the different option you have in terms of student loans. They’ll be able to explain what types of loan forgiveness programs count the forgiven debt as income and which ones don’t. Moreover, a credit repair professional is a great place to go for planning how you’re going to deal with student loans so that you can pick the best options for your situation. That’s why we always recommend talking to a credit repair expert before you take any large financial moves, or dedicate yourself to a program to have your student loans forgiven.
Sean brings a decade worth of experience in credit repair to our company. Sean started his career working in an accounting department for a major credit card company. This was a natural fit, given his bachelor’s and master’s degrees in accounting.