Paying off student loans could affect your credit score

Federal student loan borrowers everywhere are rejoicing that some or all of their debt will be wiped away.

But it could bring what experts call a temporary negative effect to personal finances.

That’s because paying off a loan is a blessing and a slight curse. You’re closer to being debt-free which also hurts your credit score.

But still, the announcement brings hope to many saddled with student loans.

“A weight was lifted off my shoulders, mostly for my parents because it stresses them out, like a lot,” said Moniest Cardell, a student loan borrower.

Cardell can see up to $20,000 of their debt disappear as long as they make less than $125,000 a year.

“Cancellation is expected to rid the balance for an estimated 20 million borrowers, that’s from the White House,” said Anna Helhoski, a student loan expert with NerdWallet. “The White House also estimates that 95% of all federal student loan borrowers are going to benefit in some way from this cancellation.”

With every action, comes an equal opposite reaction.

Any time, paying off a loan, whether that’s for your car or your home loans, you’ll see your credit score go down.

Paying off student loans is no exception.

Nerdwallet’s credit cards expert Sara Rathner said getting rid of that long-term installment loan affects the age of your accounts on your credit score as well as your mix of credit.

“It can feel a little bit like a punishment for doing the right thing when you pay off a loan, and then you see your credit score go down. But it’s a short-term problem,” Rathner said. “In the long term, it is better for you to have that debt out of your life because it frees up your money to do all these other things that you want or need to do.”

Plus, your income-to-debt ratio goes down.

And there are ways to get your score back up, like paying your bills on time every month and seeing if your credit card company will give you a credit limit increase.

If you can afford it, consider getting another card.

“That’s not an invitation to spend more money just because you have a higher credit limit,” Rathner said. “If you have that higher limit, but you keep your spending the same or even reduce it, then you lower the credit utilization.”

Which leads to increasing your score and getting you closer to other financial goals.

“There’s no greater freedom than paying off a huge loan and getting that notification that you’re done. And it can temporarily ding your credit score, but it’s temporary and paying off your debt is forever,” Rathner said.

If you paid thousands on student loans during the pandemic, the Federal Student Aid website said you can get your money back.

Contact your service provider for a refund.

For more information visit the Federal Student Aid website.