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The Reason Your Credit Score Went Down After Your Last Student Loan Payment

Debt elimination is a good thing, but some borrowers see a temporary drop in their credit score when they pay off an old student loan.

Written By: Michael P. Lux, Esq.

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Student loans can cause borrowers headaches even after the debt has been paid in full. After making a final student loan payment, and eliminating a loan, many borrowers see their credit score drop.

The good news for borrowers is that the credit score drop from paying off a student loan is usually short-lived.

The other bit of positive news is that the credit rating consequences are minimal or non-existent for the vast majority of borrowers.

Why Do Credit Scores Fall After Student Loans are Paid Off?

One of the factors in a credit score is the age of credit. People with a long credit history are viewed as less of a risk than people with a short credit profile.

Credit bureaus remove student loans from credit reports once the loan is paid in full. For some borrowers, it reduces the age of their oldest line of credit. For others, it reduces the average age of credit.

It is ridiculous that paying off debt can hurt a credit score, but that is the reality. However, it is worth noting that if there is a credit score drop, the change will be small or insignificant for the vast majority of borrowers. Paying off a loan isn’t nearly as bad as missing a payment or having debt in collections.

When Should My Credit Score Go Back Up?

The credit score improvement typically takes very little time.

In most cases, a borrower’s score will return to normal within a few months.

A longer recovery time is possible for borrowers in more extreme circumstances. For example, suppose a borrower only has a single student loan on their credit report. As a person without any credit card, auto, or any other debt, they may see a larger drop and more extended recovery time.

Fixing this Issue

Ideally, creditors and credit reporting agencies should stop penalizing consumers for repaying debt. If anything, repaying a full student loan balance should help a credit score. If the businesses involved don’t act, it might make sense for the government to intervene. There is already talk of the Biden Administration taking steps to change how credit data is reported.

Individual borrowers can’t afford to wait for broader change. Unfortunately, they have very little control over the drop in score.

The important thing for borrowers is to keep older lines of credit open. If you have an older credit card, try to keep that account active. If the credit card company charges a yearly fee, consider asking to switch the account to a no-fee option. Most credit card companies can make this change without closing the card and opening a new one.

Ultimately, the final student loan payment is unavoidable, and borrowers may see their credit score go down.

Should I Delay Paying Off My Student Loan so that My Credit Score Doesn’t Go Down?

In most cases, it won’t make sense to let a student loan linger just to prop up a credit score.

For most consumers, the value of a high credit score comes from the fact that it enables them to get better interest rates in future borrowing. The idea is that a high credit score translates to saving money on debt interest.

Prolonging student loan repayment means spending extra on interest. Spending more money on actual interest now so that hypothetical interest rates in the future might be lower doesn’t make sense.

The one exception would be for people that are applying for a mortgage soon. This particular mortgage issue is quite complicated. Keeping the loan alive may be beneficial to your credit score. However, paying off is arguably a better decision because it improves your debt-to-income ratio (DTI).

This is a situation where talking to a mortgage lender is ideal. In the best-case scenario, the student loan credit score dip hasn’t happened yet, but the debt isn’t included in DTI calculations. Final student loan payments and potential credit score drops are one of many student loan issues that borrowers should consider before applying for a mortgage.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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