Student Loans Options for Borrowers With Bad Credit
Does this question sound familiar, “Is it possible to get student loans with bad credit?” This is a fairly common concern among students and families who are seeking financing to help pay for college. Most often, this question surfaces when there is a rude awakening that grants, scholarships and federal education loans may not be enough to cover as many college costs as expected.
These days, most traditional students, enrolling in college immediately after graduating from high school, have a “thin” (fairly short) or non-existent credit history. If they have a credit history, it may not be strong enough to qualify for a credit-based student loan. So, how can you qualify for a student loan with bad credit?
Among the opportunities for students and families to consider while in-school are the following:
Types of loans that do not require credit
One solution is to find a student loan that does not require a credit check or cosigner, such as the Federal Stafford Loan (including the Direct Subsidized for undergraduates and Unsubsidized Loans for undergraduates and graduates. These federal student loans do not consider the borrower’s credit history or credit scores.
Types of loans that do require credit
The Federal Parent PLUS Loan and Federal Grad PLUS Loan do involve a modest credit check, which looks for the absence of an adverse credit history. Eligibility for the Federal PLUS Loan does not, however, depend on the borrower’s credit scores or debt-to-income ratios (the ratio of a borrower’s total debt to the borrower’s annual income).
Compare this to private student loans. A credit check and strong credit history are required for the primary borrower (and the cosigner, if applicable) AND you will typically need to pass a debt-to-income ratio review (the ratio of a borrower’s total debt to the borrower’s annual income).
How credit scores are used with federal student loans
Federal student loans such as the Direct Subsidized and Unsubsidized Loans, Perkins Loans and Direct Consolidation Loans do not use credit scores or credit history to determine eligibility for or the cost of a loan. Some federal student loans (such as the Grad PLUS Loan and Parent PLUS Loan) do base eligibility decisions on a review of the borrower’s credit history. The interest rates and fees, however, are the same for all eligible borrowers.
Grad PLUS Loans and Parent PLUS Loans do consider the borrower’s credit history (but not credit scores) when determining eligibility. The borrower of a PLUS Loan must not have an adverse credit history. A borrower is considered to have an adverse credit history if the applicant has one or more debts with a total outstanding balance greater than $2,085, debts that are 90 or more days delinquent as of the date of the credit report, or that have been placed in collection or charged off as defined in the regulations during the two years preceding the date of the credit report, OR if the applicant has been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a federal student loan debt during the five years preceding the date of the credit report.
The absence of a credit history or having a relatively short credit history is not considered an adverse credit history. So, a borrower may qualify for a PLUS Loan despite having a thin credit history.
In some circumstances, a prospective borrower may be able to qualify for a PLUS Loan by documenting to the U.S. Department of Education’s satisfaction that extenuating circumstances exist. For example, if the borrower was denied a PLUS Loan solely because of a 90-day delinquency, curing the delinquency by bring the account current may enable the borrower to qualify for the loan. The borrower should wait until his or her credit history has been updated or he or she has secured a credit-worthy cosigner (someone who will pass the credit check and, who agrees, similar to an endorser, to repay the PLUS loan if the borrower is unable to do so before reapplying for the loan.
Repayment activity on federal education loans is reported to the major credit companies, so responsibly managing student loan payments can help students build a good credit history.
State-based student loans as well as many private lenders usually require borrowers to have good credit scores, but some do not. If the student is having trouble locating a lender for student loans, he or she should contact their college’s Financial Aid Office to see the school might have institutional loan funds available either through an endowed fund or another campus source.
Find a willing, creditworthy cosigner
Another option is to borrow with a creditworthy cosigner. Education lenders base credit decisions on the FICO®Score from Fair Isaac Corporation, or an internal scoring model, or potentially the new VantageScore® which is now used by over 2,400 lenders. Adding a cosigner can not only increase the odds that the loan will be approved, but it may also yield a lower interest rate. More than 90% of new private student loans to undergraduate students and more than 75% of new private student loans to graduate and professional students require a creditworthy cosigner.