Navigating Student Loan Options with Bad Credit

Securing funding for higher education can be a daunting task, especially for students or parents with less-than-perfect credit. While a low credit score can present challenges, it doesn't have to derail your educational aspirations. This article explores the landscape of student loan options available to those with bad credit, providing a comprehensive guide to navigating the process and finding the right solutions.

Understanding the Credit Score Landscape

Credit scores and credit history show how well a person handles their debt, like making on-time payments and staying below their credit limits. A low credit score may signal to lenders that it can be riskier to lend. To help protect their investment, lenders set a minimum credit score for student loans. If you don't meet it, they will require a cosigner with better credit or impose a higher interest rate on bad or no-credit loans.

Your credit score is like a grade - one that tells lenders how likely you are to pay back money you've borrowed. If you have a college-age child, you'll need to factor in their credit score as well as your own when considering student loans. The scoring model that's used by 90% of major lenders is FICO®. The factor that's weighted most heavily is your payment history. Lenders like to see that you aren't too reliant on debt. Keeping the amount of money you owe low compared to the total amount of credit you have available will benefit your credit score. The longer you've been using credit, the longer your potential track record of managing it responsibly. It's a good idea to apply for new credit sparingly.

Taking out student loans can be overwhelming, especially for those with lower credit scores. "Student loans can help you build a better credit score if you make every required payment on time, by the due date. Whatever you do, don’t default and don’t be late with a payment or skip a payment. This can ruin an otherwise good credit score. Sign up for autopay, where the monthly payment is automatically transferred from your bank account to the lender.

Federal Student Loans: A Credit-Blind Option

Fortunately, the U.S. Department of Education offers federal student loans that don't rely heavily on credit history. Most federal student loans don’t require a credit check, so these loans are easily the best option for students with poor credit or no credit history. Federal student loans also come with competitive interest rates, and you may choose from several repayment options.

Read also: Credit Score Guide

Federal student loans for undergraduates do not take credit into consideration when approving you for the loan or determining your interest rate. The interest rate for federal student loans is the same for each borrower, regardless of their credit, and there are multiple repayment terms available. Direct loans made to undergraduate students, as well as unsubsidized and subsidized federal Direct Loans, do not require a credit check.

Types of Federal Student Loans

Undergraduate student loans include both federal and private student loans that are used to pay for your undergraduate studies.

Direct Subsidized Loans: These are available to undergraduate students with demonstrated financial need. The government pays the interest on these loans while you're in school, during the grace period, and during deferment.
Direct Unsubsidized Loans: These are available to undergraduate and graduate students, regardless of financial need. You are responsible for paying the interest on these loans during all periods.
Direct PLUS Loans: These are available to graduate/professional students and parents. Parent PLUS Loans are available to parents who want to help their child pay for school. Unlike other federal student loans, PLUS loans require a credit check, and you might not qualify if you have an adverse credit history, such as a default, delinquent account, or repossession. If it turns out you have an adverse credit history - and you don't qualify for a federal Direct PLUS loan - you're not necessarily out of luck. If you can show that your credit problems are due to extenuating circumstances, you can appeal to have your loan approved. Alternatively, you can apply with an endorser who has good credit, which is similar to having a cosigner.

Federal Loan Benefits

Federal student loans provide many benefits that aren’t typically available with private student loans. Federal student loans also come with competitive interest rates, and you may choose from several repayment options. These loans also provide benefits and protections that private student loans don’t offer, such as access to federal deferment and forbearance options, income-driven repayment programs, and student loan forgiveness programs.

Federal student loans are required by law to provide a range of flexible repayment options, including, but not limited to, income-based repayment and income-contingent repayment plans, and loan forgiveness and deferment benefits, which other student loans are not required to provide. Federal loans generally have origination fees, but are available to students regardless of income.

Maximizing Federal Aid

Before diving straight into the application, first calculate how much you need to borrow. You want to max out your federal aid, including scholarships, grants and loans, first. To determine how much you need to borrow with private loans, subtract your federal aid from your cost of attendance to see how much isn't covered.

The financial aid office at your college, career school, or trade school determines how much aid you’re eligible to receive based on the information provided on your Free Application for Federal Student Aid (FAFSA®) form.

Private Student Loans: Options and Considerations

Private student loans are provided by private lenders - banks, credit unions, and online lenders. You can use private loans to pay for education costs and living expenses, which your federal education loans might not cover. Like other types of loans, private student loans are subject to a credit check, with your score impacting approval, rates, and terms. Usually, lenders reserve the lowest interest rates for borrowers with an excellent credit report, and may not approve those with poor credit.

Private loans will almost always require a cosigner and may have higher fees or interest rates depending on your credit. While we recommend federal student aid first, we realize it doesn’t always cover the total cost of attending school. Before accepting a private loan, compare offers from different companies.

Cosigners: A Key to Approval

Can I get a private student loan with bad credit or no credit? You can get a student loan with bad credit, but not necessarily on your own. While federal loans don’t require a credit check, private student loans do. Many students don’t qualify for private loans on their own because they don’t have a credit history or they have bad credit. If that’s your situation, you may need to add a cosigner to qualify for a private loan.

Private student loans require a credit application that examines income, employment, and a credit report. The lower your credit score, the higher the risk for the lender, which translates into higher interest rates. Do I need a cosigner for a private student loan? It depends, but in most cases, yes. You don’t have to add a cosigner unless you’re under the age of majority in your state (usually between 18 and 21). But if you have a limited or poor credit history, lenders may require you to add a creditworthy cosigner to reduce their risk on the loan. Plus, more than 90% of private student loans taken out by undergraduate students are cosigned.

Read also: Student Loans Crisis

Many education loans for parents are available with a co-borrower. If you have a friend or family member who is willing to back your loan, you may be able to get a loan even with poor credit.

Private Lenders Offering Options for Bad Credit

Several private lenders are known for offering student loan options that consider factors beyond just a credit score:

Ascent: In addition to standard cosigned loans, Ascent offers a unique outcomes-based non-cosigned student loan for college juniors and seniors. These loans are based on your future income. You may qualify if you're in a high-earning field of study. Ascent sends your tuition to your school so you can focus on your education and bright future.
Funding U: Funding U does not use credit scores to make lending decisions. Instead, it considers an individual borrower's academic achievements, career path and GPA alongside credit history - like late payments and collections items. This makes it a great option for borrowers without a credit history or a cosigner.
MPower: Founded by two international students in 2014, MPower is one of the few student loan servicers that has flexible citizenship and residency requirements.
Edly: Edly is one of the few student loan companies on the market that offers income-based repayment (IBR) loans. Based in New York, the company touts its products as a private student loan alternative due to its affordability and unique payment structure.

Drawbacks of Private Student Loans

No federal benefits: Private student loans don’t come with federal benefits and protections. For example, you won’t be eligible for student loan forgiveness programs or federal deferment and forbearance options. Lack of repayment options: Unlike federal student loans, private student loans don’t provide a variety of repayment options. For example, private student loans typically don’t offer income-driven repayment or graduated repayment plans. Potentially higher interest rates: If you have excellent credit, you might get approved for a lower interest rate on a private student loan compared to a federal loan. Private student loans that have variable rates can go up over the life of the loan.

How Private Student Loan Disbursement Works

Receiving the funds for your private student loan depends on whether you’re borrowing an in-school loan or refinancing an existing loan. For in-school private student loans, the funds are typically sent straight to your school to cover tuition. The school then gives the rest of your loan money directly to you, the student, for other expenses related to getting your degree, such as housing. Your school sets the disbursement date (when you actually receive the money), which is usually around the beginning of the semester. Regardless of when you applied for the loan, your school’s disbursement date will be the same. However, it’s best to apply early so that you can avoid any unexpected confusion or delays. We suggest giving yourself at least 30 days to be safe, but be sure to contact your financial aid office to learn more about accessing your funds. For student loan refinancing, no new funds are disbursed. Instead, your new private lender pays off your existing loan(s) and gives you a new loan with new terms.

When To Apply for Private Student Loans

You can apply for private student loans at any time since there’s no deadline tied to them (like filling out the FAFSA for federal loans). But it’s still a good idea to apply for private loans as soon as you know you’ll need them to cover education costs. Although it varies depending on the lender and your school, it can sometimes take 3 to 5 weeks for you to receive the funds.

Alternative Funding Options

If traditional student loans aren't accessible, consider these alternative funding sources:

Scholarships and Grants: Scholarships are usually based on a student’s grades, skills, or abilities, and they don’t have to be repaid. The key to applying for scholarships is being prepared because most scholarships have deadlines and may require time to write essays. Remember to be cautious of student aid scams. If you’re concerned about the legitimacy of a scholarship opportunity, contact your school’s financial aid office.
School Payment Plans: Your school’s billing office (sometimes referred to as the bursar’s office, cashier’s office, or student accounts office) may have payment plans available to help you spread any remaining costs over several payments throughout a semester. A payment plan can help you budget your payments rather than paying in one lump sum.
Work-Study Programs: If your aid offer confirmed that you’re eligible for Federal Work-Study (FWS), be sure to lock in a position to help cover costs. However, even if you weren’t awarded work-study, most schools have other part-time, on-campus (and sometimes off-campus) positions that can help you pay for school expenses. Working part time can be beneficial to your education experience, as long as you can find a healthy balance between school and work.
Home Equity Loans: Another option some families may have is to consider a home equity loan. If a family has equity in their home, then a loan of this sort may offer the lowest interest rate option available. You can still be denied a home equity loan due to credit issues.

Managing Student Loan Interest

Student loan interest works by adding a percentage of the loan amount to your outstanding balance over time. This interest rate represents the cost of borrowing money. When you make monthly payments, a portion of the payment is allocated towards covering the accrued interest, while the remaining amount goes towards reducing the principal balance (the original loan amount).

Fixed- vs. Variable-Rate Loans

Before you borrow, you’ll need to decide whether you want a fixed- or variable-rate student loan. Here’s the difference between the two: A fixed-rate will stay the same over the course of your loan term. This also means your payments won’t ever change. A variable rate can fluctuate and possibly even increase over time.

Additional Resources and Support

School Financial Aid Office: Before you make any final decisions on how to fill the gap, we recommend that you meet with a representative from your school’s financial aid office to determine what resources and options may be available. There may still be time to change some of your choices before the semester begins. To request an aid adjustment, contact your school’s financial aid office.
USDA SNAP Program: The USDA’s Supplemental Nutrition Assistance Program (SNAP) is the largest federal nutrition assistance program. SNAP provides benefits to supplement the food budget of individuals and families in need so they can purchase healthy food. You can also explore your school’s meal plan options, which typically include special food pricing and may offer student discounts or deals at local restaurants, cafes, and stores. If you need additional assistance, many schools have food pantries that offer fresh produce, ready-to-eat items, and hygiene products for students at no cost.
Better Health Insurance: Better health insurance coverage could reduce the amount you pay for copays or prescription medicine.

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