Many people have no choice but to take out student loans in order to afford college. If you're one of them, but your credit is poor, you may be wondering if you'll qualify to borrow money to fund your degree. The good news is that it is possible to get student loans with bad credit, but in some cases, you'll pay the price for those loans further down the line.
What's considered bad credit?
The lower your credit score, the more challenges you might encounter on the road to qualifying for student loans (or any type of loan, for that matter). Credit scores range from a low of 300 to a high of 850, which is considered perfect credit. A score that falls between 300 and 579 is generally considered to be very poor. If your score is somewhere in this range, you may have difficulty getting approved to borrow money for college, although that won't necessarily be the case.
Why might your credit score be so low? If you’re applying for student loans directly out of high school, then chances are you haven’t yet had an opportunity to establish a solid credit history. And if you’ve never had any bills in your own name, it’s hard for lenders to determine how responsible a borrower you are.
Now, if you have had bills in your name, but you also have a history of paying them late or, worse yet, not paying them at all, then that can easily bring down your credit score, too. Similarly, carrying too much debt at the same time could move your credit score into unfavorable territory, thereby making it harder to borrow money for any purpose, college included.
Getting student loans when your credit is bad
Having bad credit won’t necessarily prevent you from getting approved for student loans. Here are a few ways to snag those loans even when your score is unquestionably poor.
1. Apply for federal loans
Federal student loans are those issued by the U.S. Department of Education, and there are many benefits to taking them out for college. First, federal loans are regulated so that their interest rates are capped at preset levels, making them much more affordable than private loans. Federal loan interest is also fixed, so you don’t run the risk that your rate will rise over the course of your repayment period.
Additionally, federal student loans come with certain borrower protections that can make repaying them easier. For example, if you have trouble keeping up with your loan payments after college, you can apply for an income-driven repayment plan, which will set your payments as a reasonable percentage of your income. You may also qualify to defer your loan payments for a period of time if you're in the midst of financial hardship.
Another great thing about federal student loans is that they don't require a credit check, which means that even if your credit score is terrible, it won't matter. To apply for federal loans, you just fill out the Free Application for Federal Student Aid, or FAFSA.
2. Get a cosigner and borrow privately
Private student loans are trickier to qualify for than federal loans because they do require a credit check. They also tend to charge higher interest rates, and their interest rates are often variable. As such, they’re generally much more expensive to pay off. And since they don’t offer the same built-in protections as federal loans do (such as income-driven repayment plans, and deferments), they’re generally less desirable.
Now you may be thinking: "In that case, I'll just stick with federal loans."
It's a good plan, but unfortunately, federal loans come with borrowing caps, so you can only borrow so much on the cheap. At present, that cap is $31,000 in total for undergraduate students who are also dependents (except for students whose parents are unable to get PLUS loans). The average tuition cost at an in-state, four-year public college is $10,230 a year. So if you have no money at all to pay for college, even if you attend one of these and skip the dorm, federal loans won't cover the $40,920 you'll need for four years of tuition. Therefore, you may have no choice but to resort to private loans.
Now, if you are going to borrow privately for college, your chances of getting approved on your own aren't all that great if your credit score is really bad. Granted, you may get approved for a loan with a ridiculously high interest rate, but even that may not happen if your credit is truly abysmal.
If that's the case, then your best bet is to find a cosigner for your student loans. That person could be a parent, a sibling, another relative, or even a family friend.
Finding a cosigner may not be so easy, though. When a person cosigns a loan, he or she agrees to be held liable in the event that you're unable to keep up with your payments once they come due. Therefore, while you might manage to convince a parent to cosign a loan for you, it's likely to be a hard sell in most other cases.
Another thing to keep in mind is that your cosigner needs to have good credit for you to qualify for private loans with your bad credit. A good credit score is one that’s 670 or above. The higher your cosigner's credit score, the greater chance you have of not only getting approved for private student loans, but snagging them at a more reasonable interest rate.
3. Find a private lender that's willing to take a chance on you
A limited number of private lenders offer student loans to applicants with bad credit, and don't require a cosigner. Rather than determine your eligibility based on your current financial situation, your potential future income is taken into account when evaluating your ability to pay off your loans on schedule. If you manage to qualify for this type of private loan, keep in mind that it may come with an astronomical interest rate in exchange for that leeway.
Alternatives to explore
Although it is possible to get student loans with bad credit, you may not secure enough financing in federal loans to fund your entire education, and you may not like the idea of getting a cosigner, or locking yourself into a loan with a ridiculously high interest rate attached to it. If that’s the case, then there are a few alternatives you might look at.
First, you can work on building your credit. Doing so won’t happen overnight, though, so you may need to postpone your studies for a semester or two to get your credit on track. But if you’re willing to go this route, get some bills in your name and start paying them on time and in full. You can also get a secured credit card and establish a credit history by making payments on that account in a timely fashion.
Once your credit score is in better shape, you can apply for private student loans again and see what rate you’re eligible for. The higher your credit rating, the lower your rate is likely to be.
Another option to consider? Delay your studies, work for a year or two, and then go back and apply for federal loans. If you manage to bank your earnings during that time, you may have enough money between your savings and federal loans to avoid costly private loans. And remember, your credit score doesn’t come into play with federal loans, so even if it doesn’t improve during that time, federal loans are still on the table.
Refinancing your student loans after the fact
If you have no choice but to take out private student loans for college, and you get stuck with a lousy interest rate because of your bad credit, you can always refinance that debt once you start working and establish a stronger credit score. Refinancing is the process of swapping one loan for another, and it’s common practice among people with student debt.
Let’s imagine that you took out private loans that came with a 15% interest rate (which is pretty bad). You may get stuck paying at that rate for a year or two after college, but if you then work on building your credit, you can explore your options for refinancing once your score is in better shape. At that point, you may end up qualifying for a new loan at 8% or 9% interest, which will lower your monthly payments and make them much easier to keep up with.
Clearly, you can borrow money for college even when your credit is bad. If you’re able to cover your borrowing needs via federal loans only, you’re in good shape. And if you’re forced to take out private loans, that may be an option, too. Just be aware that you’ll likely need a cosigner, and that you may get stuck with a higher interest rate that makes paying back your debt more difficult down the line.