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Student loan forgiveness can hurt credit scores – Financial expert predicts ‘uphill battle’

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President Biden’s Aug. 24 announcement of student loan relief measures is good news for many of the 43 million Americans with large balances. But some financial experts and social advocates have expressed concerns about the accessibility of funding and the long-term ramifications.

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One of them is entrepreneur and investor Raghunandan G (“Raghu”), who is also CEO and co-founder of Zolvea cross-border neobank that helps people moving to a new country access credit construction based on their credit profile in their home country.

Raghu thinks one of the problems with student loan forgiveness is that it can impact a benefactor’s credit rating.

“Without a strong credit history and credit score, student borrowers will face an uphill battle for decades,” he said. “While President Biden’s recent actions will give borrowers additional time and resources to improve their credit scores in a positive direction, these gains do not guarantee a successful loan interest rate change.”

Part of the problem, from Raghu’s perspective, is that a student loan makes up a large portion of a person’s credit mix, impacting their overall score. And not having this type of regular installment loan could lower that score.

“A student loan is part of the credit mix. The credit cards that students have is another part of the mix. …And if they have good repayment behavior, it all adds up,” says Raghu. “Now if there is a student who only has a student loan [and no other debt], and then because of the forgiveness, right now they don’t have a student loan, their ability to build a credit rating stops immediately. And this is where the real challenge comes in, as they will want to keep improving their credit score. »

Raghu added that even if all of your student loan debt is not forgiven, canceling $10,000 will undoubtedly shorten the term of the loan. “When the term of the loan is shortened, it has a negative impact on the credit rating,” he pointed out.

And it’s not just the ability to get loans in the future that will impact students who aren’t able to raise their credit score. It could also affect their ability to find a job once they graduate.

“[Many] employers have a credit history check. Thus, a student’s job opportunities may also stretch a bit more, mainly if they are unable to improve their credit rating. And all the loans, all the insurance they take out later on, it all gets expensive if they don’t really have a good credit rating. In the long run, it hurts the students,” Raghu noted.

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Although he made it clear that loan forgiveness is a good thing, “When it comes to building a credit score for a student, it wouldn’t really help them at all. If they don’t have other credit products, they need to start looking for other credit products now He suggested opening up credit cards and lines of credit for things like cable, rent, smart phones and other items – but always spend within your means to pay off the balance each month.

“Funneling some of their regular spending through some of these credit-building products, rent payments and similar items, would also help anyone build their credit history.”

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About the Author

Selena Fragassi joined GOBankingRates.com in 2022, adding to her 15 years of journalism with signings to Spin, Paste, Nylon, Popmatters, The AV Club, Loudwire, Chicago Sun-Times, Chicago Tribune, Chicago Magazine and others. She currently resides in Chicago with her pets and is working on a first historical fiction novel about World War II. She holds a degree in fiction writing from Columbia College in Chicago.