Whether you are heading to college out of high school or already enrolled, chances are good your credit score isn’t something to brag about — if you are even aware of it at all. Most high schools do not teach basic financial literacy, and many American teenagers enter college with no credit history. Once they are in college, many students quickly rack up a bad credit score due to the easy availability of credit cards. Yet these same students are expected to cover the cost of their pricey college educations through student loans — which often require a solid credit score to qualify. So how can you get student loans with bad credit?
Federal Student Loans are the First Option
The first and best option for student loans for all students should be through the federal government. The United States Department of Education offers student loans directly to undergraduate students regardless of their credit score. Instead, students simply have to fill out the Free Application for Federal Student Aid (FASFA) to apply for a federal student loan. This makes federal student loans an extremely attractive option for anyone with bad or no credit.
The FASFA requests basic financial information from students and their parents. The government does not check anyone’s credit score as part of the application process. Instead, the loans are granted based on financial need, with more favorable terms granted to students who have greater financial need. All federal student loans have fixed interest rates.
Students are eligible for three different types of federal student loans. Direct subsidized loans, or subsidized Stafford loans, are available in different amounts depending on what year you are in school. The main benefit of this type of loan is that the government pays the interest on the loan that accrues while you are in school. Direct unsubsidized loans, or unsubsidized Stafford loans, are also available in varying amounts based on what year you are in school. Because these loans are not subsidized, the interest on these loans accrues while you are in school. Finally, Perkins loans are available for students with extreme financial need. These loans are funded directly by the school in amounts of up to $5,500 per year.
Because federal student loans offer relatively low fixed interest rates that are not based on your credit score, they are the best option for borrowers who need bad credit student loans. The federal government gives the same interest rate to all borrowers, regardless of their credit history.
Can You Get Private Student Loans?
Although federal student loans are typically the best option for borrowers with bad or no credit, the relatively low borrowing limit means that many students will need to look elsewhere for student loans. If this is the case, then you may then need to consider private student loans.
Private student loans do not have the same protections as federal student loans such as the ability to pay based on your income or to take advantage of student loan forgiveness programs. However, if you are unable to pay for your college education a different way, then private student loans may be a good option.
As a general rule, private student loan lenders require borrowers to have good credit. Private student loan lenders also do not usually allow borrowers under the age of 25 to take out loans without a cosigner. This leaves most — if not all — college students in the position of needing a cosigner in order to be eligible for a private student loan.
First, you can attempt to apply for a private student loan without a cosigner. If you are uncertain of your credit score, this is a good opportunity to check it, which you should be doing on a regular basis anyway. You are entitled to obtain a free credit report each year, which you can obtain from one of the three major credit reporting agencies. If your credit score is in the mid-600’s or higher, you may be able to qualify for a private student loan without a cosigner.
If you do not have a decent credit score, however, you will need a cosigner in order to qualify for a student loan. Typically, a cosigner is a family member (such as a parent) or a relative. Your cosigner is essentially guaranteeing the loan, as they will become responsible for the loan if you do not make the payments. If your cosigner has excellent credit, then you will likely be able to get a good interest rate on your student loans, if not, then you may have a relatively high interest rate. Since cosigning a student loan can be a financial burden for the cosigner, carefully consider who you ask to cosign your loans. You should also review the loan documents and ask if there is a provision where your cosigner can be released from the loan. A cosigner release occurs when you make a certain number of on-time payments, and the lender agrees to remove them from the loan in return. Alternatively, you may be able to refinance your student loans in your own name in order to remove your cosigner from the loan once you have graduated and established a credit history or rebuilt your credit score.
Obtaining student loans when you have bad credit — or no credit — can be challenging, but it is not impossible. Make sure to pursue scholarships, grants, and work study opportunities first, and once those have been exhausted, look towards federal student loans. If you still need loans after taking out the maximum amount of federal student loans, consider private student loans with a cosigner.