How Will Paying Off Your Student Loans Affect Your Credit?

How Will Paying Off Your Student Loans Affect Your Credit?

(NewsBroadcast.com) – One topic that has been in the spotlight over the past few years is student loan debt and how to help people to get out from under the pile. That debate also raises concerns about how paying off student loans might impact a person’s credit rating.

Statistics

The organization Education Data Initiative (EDI) keeps track of and regularly updates information on this topic. According to their most recent data published on March 28, 2022, the outstanding balance of all student debt in the United States sits at $1.749 trillion. Additionally, that report indicates that the average federal burden is $37,113 per borrower.

When a college student graduates today, the EDI reports that 65% of them do so with some debt. The initiative’s previous update from July 10, 2021, gave a staggering bit of information: 20 years after first entering college, fully half of those who used a loan to pay for that education still have $20,000 of student debt on their balances.

Paid in Full, What Now?

Getting this kind of debt off one’s back can be quite a relief; there is no ceremony like years gone by when people would take their home loan paperwork and have a mortgage-burning party. But for many people, that sigh of relief can include the question: “how will this affect my credit score?”

The idea of how consumer lending functions can make the work of alchemists trying to turn lead into gold seem like mere child’s play. Things that go into determining those all-important FICO® scores include repayment history, total debt balance, and one’s complete DNA profile (just kidding, at least we think so — though it does sometimes seem like the lenders want blood.)

All the pieces that go into making up that final number can make that score go up or down, depending on the individual’s particular circumstances. And though it may seem backward, the initial impact can actually knock a person’s credit score down, at least temporarily. Fortunately, it typically springs back quickly and long-term, paying off student loans will raise an individual’s credit rating.

Many experts say that the formulas are such that ending a long stretch of (presumably) regular on-time payments, something every lender loves to see, may actually dock it a few points. Also, changing the ratio of revolving lines of credit to installment loans might throw things off for a while. But, they all seem to agree that the number will start on its way back up and potentially go even higher than it was in the future.

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