If someone else pays off my student loans...
August 1, 2019 12:05 AM   Subscribe

How will it affect my personal credit?

A generous family friend has offered to pay off my two (small, under $3k) student loans as a way of helping me get off my feet after a serious medical crisis.

The loans are in my name. Will my credit score be affected by this? I know almost nothing about how credit scores work, but I have heard that A) paying off loans all at once can ironically cause the score to DROP since there won't be an outstanding balance being regularly paid down and B) if it's someone else (not me) who pays them off, it doesn't help me prove to the credit agencies that I'M a responsible borrower (in this case, I guess the better option would be my friend giving me cash directly to use for the loans, but that doesn't solve issue A)
posted by CancerSucks to Work & Money (16 answers total)
I might be wrong, but I don't think they'd know where the money to pay the debt came from. The IRS may care (if you're in the U.S.) but I don't think credit scoring companies are going to know where the money came from.

Your score might take a small hit, but I don't think that outweighs the benefit of having the loans paid off.
posted by jzb at 3:50 AM on August 1, 2019 [6 favorites]

Yes, you could have to report this as a "gift" but my mom's husband worked out the amount of money they could "gift" me with no implications to me or them. There's definitely a limit there but I think $3K is well beneath it.

Check your credit score now. Lots of sites will tell you specifically what is hurting and helping your credit score. Find that information as well as the "gift tax" number from the IRS and go from there.
posted by bendy at 3:55 AM on August 1, 2019 [2 favorites]

And part of finding out what can help or hurt your credit score is research. Student loans are very different animals from a credit card in terms of credit scores. Again, do your due diligence, but I believe credit card balances are way more impactful than student loans on your credit score.

Often, student loans have very low interest rates and are funded by the Feds, so credit scores are minimally affected.
posted by bendy at 4:05 AM on August 1, 2019 [2 favorites]

Student loans don’t represent a line of credit disappearing — because they’re an installment loan, rather than revolving credit, paying them off should be a net positive for your credit score. (Also, google a little about how credit scores work; they’re not too mysterious and even though they’re technically secret, they’ve largely been reverse engineered enough to know what will raise and lower them.)
posted by chesty_a_arthur at 4:47 AM on August 1, 2019 [9 favorites]

Here is how student loans affected my credit:

I had a few different student loans, held by a few different lenders, and over about a decade those loans were themselves bought and sold by a number of further different lending companies, meaning they created a trail of different lines of credit with different lending companies.

I was paying them off one by one (debt snowball technique, plus paying some off in lumps when I had good months) over this time creating a trail of closed credit accounts with all these different companies.

What that means on my overall credit is that instead of the original 3 different credit accounts showing as closed in my credit history, I have over 20. Two things that go into your credit score are the length of your credit history and your number of open, active accounts. Closing lines of credit has a negative effect on your credit score, because it reduces your overall number of accounts and reduces your credit history.

HOWEVER. Some takeaways from this:

1) I wish I had been able to pay all of my loans off in lump sums earlier, to avoid the time they spent metastasizing, and I'm glad I was able to pay them off when I did so they didn't have the chance to change hands again. Paying them off today isn't what affects your score, it's having a loan account that will eventually close ever that does.

2) While having more than 20 closed lines of credit sitting in my credit report being supposedly a negative drain on my credit score is dumb and ugly, it can't possibly affect things THAT much. My credit score today is 817 and the only "bad" thing is the history of 20+ closed student loan accounts. I'm not losing sleep over it basically.

3. I use Mint and it has a free credit score tool that has allowed me to see all of this. It's been really useful to me to learn more about how my own actions affect my credit. I highly recommend it to you to learn more about your own credit and how credit scores work in general.
posted by phunniemee at 4:57 AM on August 1, 2019 [4 favorites]

the "gift tax" number from the IRS
Recipients generally don't have to report gifts nor pay tax on them. There is a yearly amount for the gifter that is exempt ($15K for 2019) but there is also a lifetime exemption that is much higher. The gifter just needs to report the yearly amounts to ensure they have not exceeded the lifetime exemption.
posted by soelo at 4:57 AM on August 1, 2019 [10 favorites]

Even if your credit score drops for a month or two, it will go back up again because your debt-to-income ratio will have decreased. Unless you’re looking to take out a significant loan at the same time that you pay these loans off, it’s not going to matter in the long run. A history of consistent payment is a far larger positive impact than a list of closed accounts is a negative one.
posted by Autumnheart at 5:18 AM on August 1, 2019 [8 favorites]

A student loan is not a “line of credit.”
posted by spitbull at 8:13 AM on August 1, 2019 [3 favorites]

Shortly after I left college, about 10 years ago, a generous relative paid off my student loans. It improved my credit score so much that bankers commented on it regularly—"I've never seen a 22-year-old with such a high credit score!" etc.

Have them pay it off. Unless things have changed hugely in the past 10 years, it will benefit your credit.
posted by branca at 8:18 AM on August 1, 2019 [1 favorite]

My credit core took a very small dip when I paid off my student loans in a lump sum. My credit stayed in the same general category even with the very small dip.

My overall financial situation and mental health vastly improved. Worth it.
posted by kapers at 8:20 AM on August 1, 2019

Credit scores are somewhat unintuitive, but not that unintuitive. Unless you are in a situation where you have no credit cards, no loans, no mortgage, no rent getting reported, basically completely off the credit grid, paying off debt is not going to hurt you. The things that really hurt you are missed payments, especially for long periods, and very high utilization of revolving accounts like credit cards and lines of credit. In theory, if you had an otherwise thin file, one ding might have an outsize impact, but that's not likely. Pull your report from https://www.annualcreditreport.com/ (accept no imitations, regardless of how "free" they claim to be) and make sure that the debts you are paying are getting reported accurately, and that you have some active account on there. It can be as simple as a credit card that you charge your cell phone bill to every month and pay off, if you prefer to use debit. Just something that shows you are a reliable borrower.
posted by wnissen at 9:15 AM on August 1, 2019

My college loans were just forgiven under PSLF and I took a bit of a credit ding but also that albatross is off my neck so who cares.
posted by notjustthefish at 9:38 AM on August 1, 2019 [2 favorites]

Wow, notjustthefish, can I touch the hem of your garment for good luck???

Literally the only significant negative thing on my credit report is a lack of "different types of credit." This is because I have credit cards open but no installment loans (like student loans, or car loans) open. This can only be a wee negative, given what my credit score is, and I'm sure (assuming you don't have, e.g, a car loan) it would be outweighed by the reduction in your total debt and debt utilization, which would increase your score.

The CRAs don't care where the money came from, just whether a debt is owing and paid on agreed terms or not.

So if your credit score is all you're worried about, let 'em do it.

And I agree with whoever said above that you should get your head around the basics of credit scores. There's a proprietary model at the heart of each that they obfuscate, but the basic inputs are well-known.
posted by praemunire at 9:46 AM on August 1, 2019 [1 favorite]

it doesn't help me prove to the credit agencies that I'M a responsible borrower
They don't really care about that in the way you and I would if we were lending some money to a friend. They care that you have a way to pay it back, in this case a person with money that is willing to give it to you. Even if you had committed a crime to get that money, it probably would not affect your actual credit score.
posted by soelo at 10:52 AM on August 1, 2019 [1 favorite]

Paying off an account will not hurt your credit score in any way and in fact the traces of that good credit behavior will persist on your credit report and in your credit score for years and years and years. With respect to your credit score, there is no good reason to continue to carry a balance or pay interest on revolving credit. Maybe there’s an argument to be made for hanging on to an installment loan if you don’t have much or any history built up, but once you have a year of good behavior notched, those arguments are probably moot. The

Pay it off and don’t give any of this a second thought.
posted by notyou at 1:47 PM on August 1, 2019

Who cares? Pay it off and don't pay extra interest.
posted by KMoney at 2:21 PM on August 1, 2019

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