Student Loan Options for Poor Credit Borrowers
Poor Credit Doesn't Have to Prevent You From Getting Student Loans
Student loans have helped millions of students earn a college degree. While taking on debt may not be ideal, it's sometimes necessary. Certain types of student loans require borrowers to have a good credit rating to qualify, which may be challenging if you have poor or no credit. Fortunately, it's possible to use student loans to cover college expenses even with poor credit.
Poor Credit and Federal Student Loans
Federal student loans are issued by the federal government, specifically the U.S. Department of Education. Payments on federal student loans may be made to a loan servicer, which is a third-party company that handles billing and administration of loans.
In general, the list of federal student loan options for undergraduate and graduate borrowers includes:
- Direct Subsidized and Unsubsidized Loans
- Direct Subsidized and Unsubsidized PLUS Loans (for graduate students)
- Direct Subsidized and Unsubsidized Parent PLUS Loans
- Federal Perkins Loans
Each of these loans has different repayment terms, interest rates, and maximum borrowing amounts but they have one thing in common: a poor credit score won't work against you. In fact, your credit score usually isn't taken into account at all when taking out federal student loans. With PLUS loans, there's a slight exception: you generally can't have any adverse marks on your credit history, such as a foreclosure or bankruptcy.
If you have a poor credit score and you need student loans to pay for college, you'd want to apply for federal loans first. You can do that by completing the Free Application for Federal Student Aid (FAFSA). If you're applying for aid as a dependent student, meaning your parents provide more than half your income, you'll need to include information about their income and assets on the forms. But, their credit scores won't impact your eligibility for aid any more than your own would.
Private Student Loans for Poor Credit
Federal student loans can help pay for school but they may only go so far. The Department of Education limits how much you can borrow annually and over the course of your college career. If you come up short with federal loans, you may need to turn to private student loans to fill the gap. The catch, however, is that private student loan lenders tend to give more weight to credit scores.
Private student lenders set their own guidelines with regard to the minimum credit history and score needed to be approved for a loan. In general, however, you may run into trouble qualifying for private loans with poor credit if your FICO credit score is lower than 650. In that scenario, you have two options available:
- Apply for private student loans with a cosigner
- Choose a lender that caters to poor credit borrowers
Pros and Cons of Using a Cosigner for Student Loans
Getting student loans with a cosigner simply means asking someone who has a good credit score to apply for the loans with you as a co-borrower. The advantage is that if they have a higher credit score, your odds of being approved increase. And, there's another important benefit in that private student loans determine interest rates based in part on credit scores. The better your cosigner's score, the lower your rate is likely to be.
But, having a cosigner for student loans does have its downsides. The biggest is that the cosigner is jointly responsible for the debt.
That means that if you miss a payment on your loans or default, that negative account history is reported on your credit report and theirs.
A potential workaround to that is choosing a private student loan lender that offers cosigner release. A cosigner release effectively allows you to remove a cosigner's name from the loan once you meet certain conditions, typically making a set number of on-time payments consecutively. If that's not an option, the other way to get a cosigner removed is to refinance the loans into your own name only but that usually requires a good credit score.
Pros and Cons of Using a Poor Credit Student Loan Lender
There are a handful of private student loan lenders that make loans to borrowers with poor bad credit, including:
These lenders specialize in helping students who don't qualify for other private student loans because of their credit. The main advantage is that these lenders don't require a cosigner, which means you don't have to make anyone else jointly responsible for your debt. But, there are some drawbacks.
For one thing, you may be limited as to how much you can borrow. If the lender's maximum lending cap is exhausted and you still need more money for school, you might have to get another loan with a cosigner anyway. And more importantly, these lenders may charge more in fees or attach higher interest rates to loans for poor credit borrowers.
Weighing Your Student Loan Options
When you're trying to get student loans with poor credit, federal funding should be your first stop. If you need private loan funding, consider these questions:
- How much more will I need to pay for school?
- What minimum credit score does the lender require?
- Is there someone who could act as a cosigner?
- What rates or fees does the lender charge?
- What's the highest interest rate I'm willing to accept for private loans?
Lastly, consider what you can do to improve your credit rating. If you have poor credit because of late payments in the past, for instance, focus on paying all your bills on time going forward. And if you have no credit at all, you may want to open a credit card account to build a payment history. The better your score, the better rates you'll qualify for and the less you'll pay in interest to finance your education over time.