My nephew, Brian, contacted me recently to tell me that he paid off his student loans from college. He knows how I am always talking and writing about student loan debt, so he was pretty proud to give me the good news. However, he also had some bad news. His credit score went down.

We have talked about credit scores in the past in this column, including that they are the result of algorithms being applied to the facts of your credit history. Also, that factors like payment history, availability of credit, closing accounts, long-term relationships (like a long time residence, job, or credit card account), and having a greater mix of credit facilities, like a mortgage, car loan, and credit card, but also how you handle them, can all affect you credit score — positively or negatively.

Even though nfcc.org recently explained why it can happen, it seems to me that this is an algorithm gone wild. We should be rewarding people who have made all of their payments on time, and then actually paid off their student loans in full.

Notwithstanding my personal view, here is how nfcc.org explains this lower credit score. First, Brian lives in an apartment in New York City, and doesn’t need or have an automobile, so he doesn’t have a mortgage or car loan, just one or more credit card accounts, which are revolving credit facilities — you can borrow, pay down, re-borrow, borrow more, etc. Student loans are considered to be installment loans, like a mortgage, which are a fixed amount, with regular monthly payments that when made can only reduce the debt. The credit score algorithm looks at installment loans more favorably than revolving debt. So when Brian’s one installment loan was paid, he was left with only revolving credit facilities — thus a reduction. In addition, longer-term credit relationships are rewarded over shorter-term relationships. (It is a sign of stability). In his case the student loans were older than his credit card accounts.

Credit scores can be complicated, and the reality is that paying off a loan, like a student loan, can affect different people differently, depending upon all of the various factors that credit scores take into account. Sometimes it can be counter-intuitive.

Nevertheless, I am proud of Brian. Also, remember that no matter what the debt is, the most important thing is to pay on time, and don’t miss any payments. Payment history is the most important factor for a good credit score.

On a different subject, because of the increasing annual federal deficit, some members of Congress, including the Majority Leader of the Senate, are once again talking about “entitlements,” including Social Security Retirement benefits. These are the early stages of what will surely be a future campaign, so they are not really talking about any actual specific reforms. As you know, I am one of those who believe that we will fix Social Security to make it viable long term, but also I am one of those who cannot be sure that benefits will be as generous as they are today, except for the very poor. I want to lay out a little history, and some sensible ways that the retirement program can be reformed, so that it will be easier to follow the upcoming debates.

Social Security was created with the Social Security Act, which became law on August 14, 1935. The first retirement benefits were paid in January 1937. In 1939, the law was amended to add benefits for survivors and the spouses and children of retirees. The program is funded primarily by payroll taxes and self-employment contributions. collected by the IRS. The payroll tax cap for 2018 is $128,400.

According to retirementliving.com, the program is fully funded through 2034, and even if nothing is done to reform the program — there are concerns over an increasing number of beneficiaries and fewer workers to pay the payroll taxes — projections indicate that the program could be self-sustaining after that by paying 75 percent of the current retirement benefits. If that is the worst case, as I tell students, you will still need to save more for your retirement, but there will be Social Security.

There are a number ways to reform the program, so that it can pay more than the projected 75 percent after 2034. You may be hearing a number of these being debated. First, benefits can effectively be reduced by raising the full benefits retirement age (it will be 67 in 2027), decreasing the ongoing cost of living increases, (remember it will be 2.8 percent for 2019), and phasing out benefits for wealthier retirees (means testing). Second, payroll taxes could be increased. Currently the rate is 6.2 percent of income, up to that $128,400 for an employee, and the employer also pays into the program. Obviously, the rate could be increased, or the cap on taxable income could be increased, or some combination of both. This last option seems very possible to me, so I also tell students that if they are going to be working, they might want to plan on paying more taxes. It’s that "hope for the best, but plan for the worst" philosophy, that still works.

It promises to be an interesting debate.
