Best Student Loans for Bad Credit

Matt is a Certified Financial Planner® and investment advisor based in Columbia, South Carolina. He writes personal finance and investment advice, and in 2017 he received the SABEW Best in Business Award.

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Some of the best student loan lenders offer bad credit borrowers the ability to obtain student loans with a creditworthy cosigner, but the handpicked lenders below are particularly high-quality options that landed on our shortlist.

Here are The Ascent's picks for the best student loans for bad credit

Provider Rates & Terms Great For Get Started
Rates & Terms:

Fixed Rates: 5.29 - 9.83%

Variable Rates: 3.95 - 9.81%

Terms: 5, 10, 15 years

Great For:
  • Low rates
  • Cosigner release after 24 months
  • Forbearance option
Get Started: Check Rate
  • Checking rates won't impact your credit score

Sallie Mae Student Loans

Rates & Terms:

Fixed Rates: 5.49 - 11.85%

Variable Rates: 4.37 - 11.47%

Terms: 5,15 years

Great For:
  • Specialized loan programs
  • Free FICO® Score
  • Repayment flexibility
  • Get 4 months of free homework support with Chegg's Study Starter when you apply
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CommonBond

CommonBond offers borrowers the ability to postpone their payments for as long as 24 months if they run into economic hardship. And cosigners can be released after the borrower graduates and makes 24 consecutive on-time monthly payments, one of the shortest cosigner-release times in the industry. Borrowers (and their cosigners) can check their rates without affecting their credit score, and even though CommonBond’s 2% origination fee is on the high end among private student lenders, they are still one of the most bad-credit-friendly lenders around.

Sallie Mae

Sallie Mae’s private student loans have low interest rates for borrowers with a highly-qualified cosigner, and also have no origination fees whatsoever. Speaking of cosigners, Sallie Mae has perhaps the shortest cosigner-release program in the industry. A cosigner can be released from the loan if the borrower graduates, makes 12 on-time payments in a row, and can pass a credit and income check to show their own ability to repay the loan.

How we picked the winners

There are several factors to consider when choosing a student loan, and some that are even more important if the borrower has bad credit:

Interest rates -- While a loan’s interest rate isn’t the only factor you should consider when obtaining a student loan, it’s certainly important. After all, other factors being equal, you certainly want to pay as little as possible to borrow money.

Cosigner release -- Most private lenders that require cosigners have a way for that person to eventually be released from the obligation. After all, cosigners generally don’t want to be legally responsible for someone else’s loan for decades. So a relatively easy cosigner release is a big plus for borrowers with bad credit.

Fees -- Some student loans charge origination fees, while others don’t. The same goes for prepayment penalties. These costs can make a big difference in your overall borrowing expense.

Discounts -- Most lenders offer borrowers a 0.25% interest rate discount for auto-paying their loan. However, some lenders offer additional discounts for borrowers who have existing banking relationships.

Repayment flexibility -- Most lenders allow students to defer payment while still enrolled in school. However, not all private lenders have provisions for deferments or forbearance during times of economic hardship.

Term length -- Some lenders offer just one repayment term length, while others give the borrower a choice among a few options. Control over the repayment term length translates to control over the monthly payment.

Should you use federal student loans first?

No discussion about any private student loan product would be complete without mentioning federal loans as a superior alternative.

Simply put, federal student loans have some features that make them better loan products than even the best private student loans for virtually all borrowers. For one thing, federal student loans are guaranteed by the government, so there’s no need for a cosigner and every borrower gets the same low APR. Even borrowers with bad credit will get the exact same terms on Federal Direct Subsidized and Unsubsidized Loans as every other borrower.

Federal student loans are also eligible for income-driven repayment plans, and are the only way to qualify for loan forgiveness programs like Public Service Loan Forgiveness (PSLF). Federal student loans also tend to be far more flexible if you need to postpone repayment during tough times, or if you go back to school. And finally, some of your federal loans may be subsidized, meaning that the government pays your interest while you’re in school.

The biggest downside to federal student loans is their borrowing limits, especially for undergraduate students. In many cases, federal loans are not sufficient to cover students’ full financial need all by themselves. That’s where private loans come in.

In short, if you can use federal loans, that’s probably the best option. If you still need more, then and only then should you look to the private marketplace. In fact, federal loans are so superior that many private lenders go so far as to encourage borrowers to exhaust their federal loan borrowing capacity before considering a private loan.

How to get a student loan with bad credit

There are two main options if you have bad credit -- apply for a loan on your own or apply with a cosigner.

Your ability to use the first option depends on the lender and just how bad your credit is. Some private lenders require all student borrowers to apply with a cosigner, regardless of credit history. Furthermore, if your credit is bad enough, you won’t be able to get a student loan from a private lender without a cosigner.

On the other hand, if your credit is below-average (the national average FICO® Score is about 700), but is somewhere in the 600s, you may be able to qualify for a student loan on your own merit. However, if you do, it’s fair to expect that you’ll pay an interest rate that’s toward the high end of your lender’s spectrum.

Should I get a cosigner if I have bad credit?

First off, many private student lenders require that borrowers have a cosigner, even if they have good credit. So if you plan to apply for a loan on your own, double-check to make sure your lender will allow it.

If your credit is bad, but not that bad, and your lender allows solo applicants, you may be able to get a student loan all by yourself. However, it’s important to emphasize that if you have a creditworthy individual who is willing to co-sign your loan, that’s generally the best course of action.

As I discussed in the last section, private student lenders generally publish a range of interest rates student loan borrowers can get. And while there are other factors that determine the interest rate given to a particular borrower, it’s fair to assume that credit plays the biggest role. In short, if your credit is bad, you can assume that you’ll be towards the high end of the interest rate range, if you get approved at all.

On the other hand, when someone cosigns your loan, they are essentially loaning you their credit. In other words, if your FICO® Score is 550 and your co-signer’s is 750, your loan offer will be based on a score of 750.

Will a student loan improve my credit score?

Even if you have a cosigner, you’ll still be the primary borrower on your student loan, so it could certainly help you build (or rebuild) your credit score.

A student loan is a form of installment debt, similar to a mortgage or auto loan. While there are some unique aspects of student loans, such as income-driven repayment and loan forgiveness programs (for student loans), in-school deferments, and more, at the end of the day, student loans are in the same category as other installment loans when it comes to their impact on your credit score.

The easiest way you can improve your credit score with a student loan is simply by making all required payments on time since 35% of your FICO® Score is based on your payment history.

In addition, 30% of your score is based on the amount you owe. On installment loans, this generally means the amount you owe relative to your original loan balance, so as your student loan gets paid down over time, it can be a positive catalyst to your credit score. If you want to jump-start your credit repair efforts, it could be a smart idea to start making payments on your loans while you’re in school, even if you aren’t required to.

How to choose the right student loan for you

To be perfectly clear, Federal Direct Subsidized and Unsubsidized student loans are by far the best choice for all student borrowers, so regardless of your credit, you should max those out first before looking to the private lending industry.

If you still have financial need, it’s generally a smart idea for bad-credit borrowers to have a creditworthy cosigner in order to get the best loan terms. Compare all of the features of a few prospective lenders, particularly the process for eventually releasing the cosigner from the obligation. There’s no such thing as a perfect student loan product for everyone, so consider all the pros and cons of the available options before making a decision.

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