Navigating Credit Options: A Guide for Students

Starting college is an exciting time filled with new experiences and opportunities. As you embark on this journey, it’s important to think about your financial future. Understanding your options can help you make the right decision for your situation. Establishing a good credit history while in school can help you get a head start on achieving your goals-whether it’s buying a car, renting an apartment or securing a job post-graduation. This article aims to guide students through the maze of credit options available to them, from student loans to credit cards, and how to manage them responsibly.

Understanding the Basics of Credit

Credit is a representation of your ability to borrow money and repay it over time. Your credit history shows how responsibly you manage debt. Good credit is a key to financial stability. Having good credit could help you get approved for loans with lower interest rates, higher credit limits and more favorable terms.

A credit score helps lenders and credit issuers quickly assess your credit history and the likelihood that you can pay back debt. Credit scores range from 300 to 850. Higher scores indicate better creditworthiness. There are different types of credit scoring models, but the best known one is probably FICO, which uses an algorithm to predict customer spending habits and rates their financial responsibility on a scale of 300 to 850. Getting a 300 is considered a poor score and an 850 is excellent. The process of building credit typically begins at age 18. Before then, most people do not have a credit score or report.

Paying for College: Exploring All Avenues

Paying for school can be challenging, so it’s important to first research how you can pay for college without loans. You have choices about how to pay for college. It’s important to first research how you can pay for college without loans. But if you need additional assistance, it’s generally best to apply for grants, scholarships, and then federal student loans before private loans. Don’t let student loans get in the way. Learn about the most common ways to get help paying for college and trade or career school. You will learn about funding you can get from the government, your school, and private sources.

Grants and Scholarships

Grants and scholarships are a type of financial aid that doesn’t have to be repaid. Grants are often need-based, while scholarships are usually merit-based. Learn about the types of student grants, their eligibility requirements, and when they must be repaid. This type of free money from nonprofit and private organizations may be based on academic merit, talent, financial need, or a particular area of study. Learn about finding and applying for scholarships. Start by researching available scholarships and grants and applying for as many as you can.

Federal Work-Study Programs

Federal work study programs provide part-time jobs for undergraduate and graduate students to help pay for their education expenses. The Federal Work-Study Program allows you to pay for school by earning money at a part-time job. You will earn at least the current federal minimum wage at a job that may be related to your studies. Learn more about the work-study program. Ask your financial aid office about the options for getting paid for work-study.

Tuition Payment Plans

Tuition payment plans, also called tuition installment plans, are short-term payment plans that split your college bills into equal monthly payments. Payment plans generally vary by college or university, but in addition to breaking up the payments, schools usually don’t charge interest. The CFPB has observed varied and sometimes inconsistent disclosure of terms, forced enrollment, high late fees, and consumer right waivers among some tuition payment plan products.

Income Share Agreements (ISAs)

Income share agreements (ISAs) are a type of private education loan where you receive money to pay for your education and you promise to make future payments based on a percentage of your income. This means that the higher your salary, the higher your ISA payment. Because an ISA may pose unique risks to borrowers and can often cost more over the life of the loan than traditional student loan products, it is best to max out your federal student loans (if available) and other options-such as scholarships and grants-before you enter into an ISA. If you’re considering taking on more than one ISA, keep in mind that each one requires a percentage of your income, so you’re committing an additional percentage of your income with each new agreement. Further, if you already have student loan obligations, you will be required to pay those in addition to paying a percentage of your income under the terms of your ISA contract, which may lead to excessive debt. Be sure to read the terms and conditions carefully and fully understand them before opting for an ISA. ISAs are generally subject to federal consumer financial laws.

Navigating Student Loans: Federal vs. Private

Even after considering other financial assistance programs, you may still need additional help to pay for college through federal or private student loans.

Federal Student Loans

Federal student loans are made and guaranteed by the Department of Education, including Direct subsidized loans, Direct unsubsidized loans, and PLUS loans. Most federal student loans are deferred, which means you don’t need to make payments until six months after you graduate or drop below half-time enrollment. 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.

Read also: Credit Card Guide for Students

Private Student Loans

We encourage students and families to start with savings, grants, scholarships, and federal student loans to pay for college. Evaluate all anticipated monthly loan payments, and how much the student expects to earn in the future, before considering a private student loan. Private student loans that have variable rates can go up over the life of the loan.

Sallie Mae loans may be offered at a lower rate than PLUS depending on the creditworthiness of the applicant(s). Explore federal loans and compare to make sure you understand the terms and features. Loans for Undergraduate & Career Training Students are not intended for graduate students and are subject to credit approval, identity verification, signed loan documents, and school certification. Student must attend a participating school. Student or cosigner must meet the age of majority in their state of residence. permanent resident). Requested loan amount must be at least $1,000. For applications submitted directly to Sallie Mae, loan amount cannot exceed the cost of attendance less financial aid received, as certified by the school. Miscellaneous personal expenses (such as a laptop) may be included in the cost of attendance for students enrolled at least half-time.

Sallie Mae Student Loans: An Overview

Sallie Mae offers loans for undergraduate students, subject to credit approval, identity verification, signed loan documents, and school certification. The student must attend a participating school, and either the student or cosigner must meet the age of majority in their state of residence. The requested loan amount must be at least $1,000.

Advertised APRs for undergraduate students assume a $10,000 loan with a 4-year in-school period, a 6-month grace, and the longest loan term offered. Interest rates for variable rate loans may increase or decrease over the life of the loan based on changes to the 30-day Average Secured Overnight Financing Rate (SOFR) rounded up to the nearest one-eighth of one percent. Advertised variable rates are the starting range of rates and may vary outside of that range over the life of the loan. Interest is charged starting when funds are sent to the school.

With the Fixed and Deferred Repayment Options, the interest rate is higher than with the Interest Repayment Option and Unpaid Interest is added to the loan’s Current Principal at the end of the grace/separation period. To receive a 0.25 percentage point interest rate discount, the borrower or cosigner must enroll in auto debit through Sallie Mae. The discount applies only during active repayment for as long as the Current Amount Due or Designated Amount is successfully withdrawn from the authorized bank account each month. It may be suspended during forbearance or deferment.

Read also: Cosigner-Free Student Loans

Although Sallie Mae does not charge a penalty or fee if you prepay your loan, any prepayment will be applied as provided in your promissory note - first to Unpaid Fees and costs, then to Unpaid Interest, and then to Current Principal.

The Role of a Cosigner

Based on a comparison of the percentage of students who were approved with a cosigner to the percentage of students who were approved without a cosigner from October 1, 2023 to September 30, 2024, having a co-signer can significantly increase the chances of loan approval. The borrower or cosigner must enroll in auto debit through Sallie Mae to receive a 0.25 percentage point interest rate reduction benefit. This benefit applies only during active repayment for as long as the Current Amount Due or Designated Amount is successfully withdrawn from the authorized bank account each month. It may be suspended during forbearance or deferment. Based on the percentage of approved undergraduate loans that were cosigned from October 1, 2023 to September 30, 2024, a large percentage of undergraduate loans are cosigned.

Repayment Options

With a private student loan, you’ll typically have a choice of several repayment options. The type of repayment option you choose should be based on your ability to repay the loan.

Deferred Repayment

This option means making no payments while enrolled in school and beginning payments within a set time frame after you graduate, leave school, or drop below half-time enrollment. Keep in mind that with private student loans, interest starts accruing as soon as the loan is disbursed (when your school receives funds).

Interest-Only Repayment

Additionally, interest-only repayment could get you a lower interest rate compared to the same student loan with deferred repayment. Both immediate and interest-only repayment options could also result in lower monthly payments after you graduate.

While there are no eligibility criteria for borrowers when choosing a repayment option, there are eligibility criteria for being approved for a loan. Keep in mind a family’s selection is personal and should be based on the ability to repay. It's important to closely read and understand the language in your loan's promissory note, since it governs terms and conditions of private student loan repayment. Be sure to discuss repayment with the cosigner so each party understands how repayment will work and who will be responsible for what amount of the loan.

Understanding Loan Costs: An Example

Savings comparison assumes a freshman student receives a $10,000 Smart Option Student Loan with the most common variable rate as of January 2025 and the longest loan term offered. Examples of typical transactions for a $10,000 Smart Option Student Loan with the most common fixed rate, Fixed Repayment Option, two disbursements, a 4-year in-school period, and a 6-month grace: For a borrower with the shortest loan term, it works out to 16.16% fixed APR, 51 payments of $25.00, 119 payments of $296.32 and one payment of $41.82, for a total loan cost of $36,578.90. For a borrower with the longest loan term, it works out to 16.38% fixed APR, 51 payments of $25.00, 177 payments of $265.54 and one payment of $173.00, for a total loan cost of $48,448.58. Loans that are subject to a $50 minimum principal and interest payment amount may receive a loan term that is less than 10 years. A variable APR may increase over the life of the loan. A fixed APR will not.

Building Credit in College: Credit Cards and Beyond

Students starting college want to be set up for success both during school and after - and one aspect that can help beyond the classroom is getting a head start on building credit. In addition, through the process of building a good credit score, you can develop healthy financial habits such as managing debt responsibly, i.e., paying bills regularly and on time. Building credit while in college can set you up for a strong financial future, especially as you start your career.

The Role of Credit Cards

A credit score is a big part of a student’s financial identity. Credit cards can help establish a good credit score, making it easier to get approved for an apartment, a car loan and even a job. Credit vs. Credit and debit cards look similar, but function very differently.

Student Credit Cards

Another option to consider is looking into a student credit card. There are many options out there, but this type of credit card is specific for those still in school. If a student is confident that they can pay off purchases on time, using a credit card responsibly can help build your credit history. It may also offer other valuable benefits including rewards. Beyond a student credit card, a student may also be able to become an authorized user on a family member’s credit card.

Bank of America has a variety of credit cards for students & young adults. Bank of America can help students & young adults make more confident decisions about major expenses, such as buying a car or planning a trip.

Find student credit cards from Mastercard. Compare cards from our partners, view offers, and apply online for the credit card that best fits your needs.

Capital One Student Credit Cards

Capital One offers several credit cards designed for students:

Capital One Quicksilver Student Cash Rewards Credit Card: Earn unlimited 1.5% cash back on every purchase, every day. Plus, earn $50 when you spend $100 in the first three months. There is no annual fee, foreign transaction fees, or hidden fees.
Capital One Savor Student Cash Rewards Credit Card: Earn unlimited 3% cash back at grocery stores (excluding superstores like Walmart® and Target®), on dining, entertainment and popular streaming services, plus 1% on all other purchases. Plus, earn $50 when you spend $100 in the first three months. There is no annual fee, foreign transaction fees, or hidden fees. Earn unlimited 5% cash back on hotels, vacation rentals and rental cars booked through Capital One Travel.

Both cards offer the ability to lock your card in the Capital One Mobile app if it’s misplaced, lost or stolen, and the opportunity to earn up to $500 a year by referring friends and family when they’re approved for a Capital One credit card.

Other Credit Card Options

Zolve Classic Credit Card: This card is designed for students without a Social Security Number (SSN) or prior credit history. It offers a credit limit of up to $15,000, a zero annual fee, and earns 1% cashback on every transaction or purchase. It reports to all three main credit bureaus: Equifax®, Experian®, and TransUnion®.
Discover Student Credit Cards: Discover offers cashback rewards, no annual fees and other perks. There is no set credit limit as everyone's situation is different. Only Discover automatically gives unlimited Cashback Match to all new cardmembers: we’ll match all the cash back you’ve earned at the end of your first year.

Building Credit Without a Credit Card

Yes, there are several ways you can build credit without a credit card. For example, make on-time payments and ensure that any bills you pay regularly are reported to credit bureaus.

Practical Steps to Build Credit

Become an Authorized User: One of the easiest ways to start building credit is to become an authorized user on a parent or guardian’s credit card account. This means you can use the credit card, and the account’s history will appear on your credit report. Keep in mind that it works both ways. Being an authorized user can give you a head start in building your credit, but misusing it can also harm your credit score.
Get a Secured Credit Card: A secured credit card is an excellent tool for college students to start building credit. Unlike traditional credit cards, a secured card requires a security deposit, which usually serves as your credit limit. Using a secured credit card responsibly can help you build a positive credit history. Make small purchases and always pay your balance in full each month to avoid interest charges.
Pay Bills on Time: Payment history is one of the most significant factors in building and maintaining a good credit score.
Report Rent Payments: If you live off-campus and pay rent, you may be able to use your rent payments to build your credit. Some landlords and rental services report rent payments to credit bureaus, which can help boost your credit score if you pay on time each month.
Consider a Co-signer for Loans: Having a co-signer can help you get approved for loans you might not qualify for on your own, such as auto loans. This is a great opportunity to build credit by demonstrating your ability to make consistent, timely payments against larger borrowed amounts.
Make Student Loan Payments: Even if your student loans aren’t due until after graduation, making small payments while still in school can be beneficial. Many student loan providers offer payment plans that allow you to start with small amounts.
Monitor Your Credit Report: You’re entitled to a free credit report from each of the 3 major credit bureaus annually. Monitoring your credit report helps you ensure all your information is accurate. You can stay on top of your credit status and catch errors or signs of identity theft early.

How Long Does it Take?

Building a solid credit history can take several months to a few years, depending on how actively you manage your credit. When you’re around age 18, this can seem like a long time! But being patient should pay off.

Common Mistakes to Avoid

Missing a payment deadline to a card issuer, lender, landlord or utility company can negatively impact your credit score and stay on your credit report for up to 7 years. Common mistakes include missing payment due dates, maxing out credit card limits, applying for too many credit accounts in a short period and not regularly monitoring your credit report for errors.

Monitoring Your Credit

Checking your own credit report is a soft inquiry and doesn’t affect your credit score. Regular checks help you monitor your credit and can help you identify any errors or fraud. Although a credit report is full of useful information, it doesn’t give an actual score. While there’s a lot to keep track of in college, it can help if students monitor their credit report. Keep in mind, it may take three to six months of credit activity before a credit score is created. Monitoring credit is also a safety mechanism against identity theft, though not foolproof.

Potential Pitfalls: How Building Credit Can Backfire

Let’s talk about the elephant in the room - how building credit can backfire. To stay in good financial health, make sure student loans and credit card bills are paid on time. Don’t miss any payments and consider setting a phone reminder to receive alerts and notifications of the bill’s due date. If you’re considering opening a credit card, be sure not to max it out. Just because the available credit limit on the card seems high, you don’t have to spend that much. Also, avoid applying for too many lines of credit in a short amount of time. If you are an authorized user, keep in mind misusing the credit card can negatively impact the primary cardholder.

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