Here's how Biden's student loan forgiveness could affect your credit score

The Laurel Road Student Loan is no longer available to new applicants. 

President Biden announced Wednesday his long-awaited plan to forgive up to $20,000 worth of federal student loan debt per borrower.

If you're one of the millions of borrowers who are affected by this news, it's a good time to think of the implications that sweeping loan cancellation would have on both your credit score and your finances overall.

Below, Select spoke with Travis Hornsby, founder of Student Loan Planner, to learn more about what federal student loan borrowers can expect.

If you've ever pulled your credit report, you've likely seen your student loans listed on there as a type of installment loan. This is a good thing, as it shows your student debt actually adds to your mix of credit. Lenders like to see a variety of credit — both revolving and installment credit — because it illustrates that a borrower can manage the different obligations that come with borrowing all kinds of money.

For this reason, paying off an installment loan such as student debt can actually ding your credit score since it lessens your overall credit mix. Hornsby says not to worry, though. The dip in your credit score will be only temporary and it's likely to go back up within several months.

"Overall, loan forgiveness is a fantastic thing," Hornsby tells Select. "Focus on getting the loan forgiveness, and any kind of impact to your credit score is going to be insignificant."

The only exception here that Hornsby points out is if student loan forgiveness happens at around the same time you're making a big-ticket purchase, such as a house or a car. If you're planning to borrow money to finance a new home or vehicle, you may want to consider getting pre-approved so your credit score is as high as possible when you go to apply.

The bottom line here is that your credit score will likely be impacted, but only briefly and barely — as in a 5- to 10-point drop.

Hornsby adds that he most often sees people focusing on credit scores to their detriment, but when it comes to loan forgiveness, you shouldn't worry about any temporary changes to your credit score.

Having $10,000 of student loans erased from your debt balance would certainly impact your finances in a good way. That's $10,000 you're off the hook for and would no longer need to pay.

According to Hornsby, though, there are other positive — and negative — financial outcomes when it comes to having all or a portion of your student loans forgiven. Here are some things to consider.

Your debt-to-income ratio will go down

A large debt load, such as thousands of dollars in student loans, boosts what's called your debt-to-income ratio, or DTI. A high DTI can make it more difficult to borrow money in the future since it indicates that the amount you owe exceeds the amount you're making. When student loans are forgiven, however, this lowers your DTI, narrowing the gap between your outstanding debt and income.

You may get a refund

It has been confirmed that federal student loan borrowers who continued making payments throughout the pandemic-induced payment and interest freeze — which is now in effect through Dec. 31, 2022 — will be eligible for a refund.

You could owe more in taxes

Thanks to the American Rescue Plan of 2021, student loan forgiveness is tax-free through 2025 on a federal level, though you may owe state taxes.

Any negative payment history may remain on your credit report

Whether student loan forgiveness completely wipes out your remaining student debt or just a portion of it, your payment history from those student loans will likely remain on your credit report. That's good news if you have a solid history of making on-time monthly student loan payments, but not so good news if you haven't been consistent.

Hornsby adds, however, that it's possible negative marks and late payments would be taken off your report following loan forgiveness, yet, this is not certain. Late payments typically appear on your credit report and stay there for seven years.

This is important to note because one's payment history is the most important factor in their credit score, making up a 35% chunk of their credit score calculation. Good payment history can seriously help keep your credit score high, while a poor payment history can seriously hurt it.

This is the first time student loans are being forgiven on a widespread scale so there still are some unknowns. However, you can rest assured knowing that any forgiveness is a good thing overall. Even if debt cancellation may ding your credit score five or so points, it wouldn't be for long and the positive financial implications of forgiveness we believe outweigh any negative results.

Just remember that this announcement doesn't affect anyone with private student loans. If you currently have private student loans, consider refinancing them for a lower interest rate and better terms with a lender like SoFi or Laurel Road.

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*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.

* Fixed rates range from 3.99% APR to 9.99% APR with 0.25% autopay discount and 0.125% SoFi Plus discount. Variable rates range from 5.74% APR to 9.99% APR with 0.25% autopay discount and 0.125% SoFi Plus discount. Unless required to be lower to comply with applicable law, Variable Interest rates will never exceed 13.95% (the maximum rate for these loans). SoFi rate ranges are current as of 5/6/26 and are subject to change at any time. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. You may pay more interest over the life of the loan if you refinance with an extended term. Autopay Discount: The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly payments as outlined in your loan agreement by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. When the autopay interest rate deduction is added or removed, the next time the loan is re-amortized (quarterly for fixed rate loans; monthly for variable rate loans),the principal balance of your loan will be spread over the remaining loan term, and your monthly payment amount will change. This benefit is suspended during periods of deferment, grace period, or forbearance. Autopay is not required to receive a loan from SoFi. Member Rate Discount: To be eligible for an additional 0.125% interest rate reduction on a Student Loan Refinancing, you must, within 31 days of loan funding, either (1) be a SoFi Plus subscriber, (2) receive an Eligible Direct Deposit into a SoFi Checking or Savings account, or (3) receive at least $5,000 in Qualifying Deposits into a SoFi Checking or Savings account. You must continue to meet at least one of the above eligibility criteria every 31 days to maintain the discount. See the SoFi Plus terms for details on SoFi Plus subscription. For more details on Eligible Direct Deposit or Qualifying Deposits, please see https://www.sofi.com/legal/banking-rate-sheet. Once you become eligible during the initial period, the discount will be removed or reinstated depending on whether the criteria have been met. Each time your loan is re-amortized, your monthly payment amount will change based upon the interest rate that was in place. SoFi reserves the right to modify or terminate this offer at any time for unenrolled participants. You are not required to meet these criteria to be approved for a loan. SoFi Plus Discount: To be eligible to receive an additional (0.125%) interest rate reduction on your Student Loan Refinancing (your "Loan") for enrolling in SoFi Plus, you must enroll in SoFi Plus within 30 days of Loan funding, either by receiving an Eligible Direct Deposit to your SoFi Checking and Savings account, or by paying the SoFi Plus Subscription Fee. Once eligible, you will receive this discount during periods in which you have received Eligible Direct Deposit to your SoFi Checking and Savings Account, or during periods in which SoFi successfully receives payment of the SoFi Plus Subscription Fee. This discount lowers your interest rate but does not change the amount of your regular monthly payment. This discount will be removed during periods in which SoFi determines you have turned off Eligible Direct Deposit to your Checking and Savings account or in which you have not paid the SoFi Plus Subscription Fee. SoFi reserves the right to change or terminate this interest rate reduction offer for unenrolled participants at any time without notice. You are not required to enroll in Eligible Direct Deposit or to pay the SoFi Plus Subscription Fee to be eligible for Loan approval. See what qualifies as an Eligible Direct Deposit here: www.sofi.com/terms-of-use/#slr-discount
Eligible Direct Deposit means regularly recurring deposit of regular income to an Automated Clearing House ("ACH") Network during a 30-Day Evaluation Period (as defined below). Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not generate payments that are detectable by our system. So qualifying direct deposits are those where the student loan refinance discount rate is applied automatically for each month where you have an Eligible Direct Deposit of at least $1,000 per 30-day Evaluation Period. Eligible Direct Deposit does not include transfers between accounts you own, refunds, rebates, reimbursements, stimulus payments, merchant refunds, or payments from person-to-person payment services (such as Venmo). To qualify for the 0.25% interest rate reduction, the direct deposit must be recurring and paid directly into a SoFi Checking or Savings account. For the avoidance of doubt, deposits made via check, cash, or mobile check deposit are not eligible. Direct Deposit eligibility is determined by SoFi's sole discretion. The 30-Day Evaluation Period refers to the period starting on the "Start Date" and ending on the "End Date" set forth on the App Details page of your account, which comprises a period of 30 calendar days (the "30-Day Evaluation Period"). You can access the APV Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking → Checking → APV or (ii) Banking → Checking → APV Details. If you do not qualify for the discount during the initial 30-Day Evaluation Period, your loan will not be eligible for a discount unless you re-qualify in a later 30-Day Evaluation Period. If you qualify during the 30-Day Evaluation Period, the discount will be applied on a going-forward basis only. SoFi Bank determines eligibility. If you have a joint account, each account holder receives Eligible Direct Deposits into your SoFi Checking and Savings account, then you will be eligible for all SoFi Plus benefits, including on accounts you hold in your own name. Federal Loan Disclosure: Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELiIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligiblity. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).