A lot of people have no choice but to go out student loans in order to pay for college. If you are one of them, but your credit is low, you may be wondering if you will be eligible to borrow money to finance your degree. The good news is that it is possible to get student loans with bad credit, but in some cases you will pay the price later.
What is considered bad credit?
The more your credit rating, the more challenges you might encounter on your way to eligibility 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 between 300 and 579 is generally considered very bad. If your score is somewhere in this range, you might have difficulty getting permission to borrow money for college, although it doesn’t necessarily have to be.
Why can your credit score be so low? If you apply for a student loan straight out of high school, chances are you haven’t had a chance to build a solid credit history yet. And if you’ve never had a bill in your name, it’s hard for lenders to determine how responsible you are.
Now if you have had bills in your name, but you also have a habit of paying them late or worse yet not paying them at all, this can easily lower your credit score. Likewise, getting into too much debt at the same time could shift your credit score into unfavorable territory, making it more difficult to borrow money for any purpose, including college.
Getting student loans when your credit is bad
Having bad credit won’t necessarily prevent you from getting approved for student loans. Here are some ways to get these loans even when your score is unmistakably bad.
1. Apply for federal loans
Federal student loans are those issued by the US Department of Education, and there are many benefits to getting them for college. First, federal loans are regulated so that their interest rates are capped at predefined levels, making them much more affordable than private loans. The interest on the federal loan is also fixed, so you don’t run the risk of your rate going up during your repayment period.
In addition, federal student loans come with certain protections for borrowers that can facilitate their repayment. For example, if you have trouble paying off your loans after college, you can apply for an income-based repayment plan, which will set your payments at a reasonable percentage of your income. You may also be eligible to defer your loan payments for a period of time if you are in financial difficulty.
Another advantage of federal student loans is that they don’t require a credit check, which means that even if your credit score is bad, it won’t matter. To apply for federal loans, all you need to do is complete the Free Federal Student Aid Application, or FAFSA.
2. Get a co-signer and borrow privately
Private student loans are more difficult to obtain than federal loans because they require a credit check. They also tend to charge higher interest rates, and their interest rates are often variable. As such, they are generally much more expensive to repay. And because they don’t offer the same built-in protections as federal loans (like income-based repayment plans and deferrals), they’re generally less desirable.
Now you might be thinking, “In that case, I’ll stick to federal loans.
It’s a good plan, but unfortunately federal loans come with borrowing limits, so you can only borrow cheaply. Currently, this limit is $ 31,000 in total for undergraduate students who are also dependent (except for students whose parents are unable to obtain PLUS loans). The average tuition fee at a four-year public college in the state is $ 10,230 per year. So if you have no money to pay for your education at all, even if you attend one of them and skip the dorm, federal loans won’t cover the $ 40,920 you need. for four years of schooling. Therefore, you may have no choice but to resort to private loans.
Now if you are if you are going to borrow privately for college, your chances of getting approved by yourself are not that great if your credit score is really bad. Sure, you can get approved for a loan with a ridiculously high interest rate, but even that may not happen if your credit is really bad.
If this is the case, then your best bet is to find a co-signer for your student loans. This person can be a parent, sibling, other relative, or even a family friend.
However, finding a co-signer might not be that easy. When someone co-signs a loan, they agree to be held responsible in the event that you fail to meet your payments once they are due. Therefore, even if you do manage to convince a parent to co-sign a loan for you, it is likely to be a hard sell in most other cases.
Another thing to keep in mind is that your co-signer must have good credit in order for you to qualify for private loans with your bad credit. A good credit rating is the one that is 670 or more. The higher the credit score of your co-signer, the more likely you are to not only get approved for private student loans, but also get them at a more reasonable interest rate.
3. Find a private lender willing to take your chances
A limited number of private lenders offer student loans to applicants with bad credit and do not require a co-signer. Rather than determining your eligibility based on your current financial situation, your potential future income is taken into account when assessing your ability to repay your loans on time. If you do manage to qualify for this type of private loan, keep in mind that it can come with an astronomical interest rate in return for this leeway.
Alternatives to explore
Even though he is possible to get student loans with bad credit, you might not get enough funding in federal loans to fund all of your education, and you might not like the idea of have a co-signer or lock yourself into a loan with a ridiculously high interest rate. this. If so, there are a few alternatives that you can consider.
First of all, you can work on building your credit. This won’t happen overnight, so you may have to postpone your studies for a semester or two to get your credit back on track. But if you’re ready to go this route, get bills in your name and start paying them on time and in full. You can also get a secure credit card and establish a credit history by making payments to that account on a timely basis.
Once your credit score is in better shape, you can apply for private student loans again and see what rate you qualify 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, then go back and apply for federal loans. If you can manage to bank your earnings during this time, you may have enough money between your savings and federal loans to avoid expensive 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.
Refinance your student loans after the fact
If you have no choice but to take out private student loans for college and end up with a terrible interest rate because of your bad credit, you can always refinance that debt once you start working and you build a better credit rating. Refinancing is the process of swapping one loan for another, and it’s common practice among people with debt.
Say you took out private loans with a 15% interest rate (which is pretty bad). You may be forced to pay at this rate for a year or two after college, but if you then work on building your credit, you can explore your refinancing options once your score improves. At this point, you could qualify for a new loan at an interest rate of 8 or 9%, which will lower your monthly payments and make them much easier to follow.
Clearly you can borrow money for college even when your credit is bad. If you are able to meet your borrowing needs only through federal loans, you are in good shape. And if you are forced to take out private loans, that can also be an option. Just be aware that you will likely need a co-signer and you could end up with a higher interest rate which will make it harder to pay off your debt in the long run.