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Can Your Credit Score Affect Your Federal Aid?

Jun 18, 2012 Jennifer Williamson, Distance Columnist | 0 Comments

Most traditional students who apply for federal and private financial aid don’t have a credit history—because they’re either still in high school or recently graduated. However, even if that’s the case for you, your parents’ credit scores can still impact your financial aid situation. And if you’re an adult student with an established credit history, that could have an impact on your student loans as well.

But maybe not as much as you think. Here’s an overview of how your credit score is used by both the federal government and private lenders when determining the details of your student loans.

Government Loans

There are essentially two types of federal loans: those for students and those for parents.

Loans for students

Students Studying

College is expensive for everyone, online and traditional students alike. But scholarships and grants, if you can find them and qualify them, make it much easier.

The most common loans given in the student’s name by the government are the Stafford or Perkins loans.  As a student, you are generally not expected to have a credit history—even if you have one. Even if you’re an adult student, the lender doesn’t take into account your credit history when you get one of these loans—so you qualify even if you have no credit history or a low credit score.

The exception to this rule is if you are already in default on a federal loan or you owe money to the federal government for another reason. If this is the case, you won’t qualify for federal aid until this debt is settled.

Loans for parents

While the federal government does offer Perkins and Stafford loans directly to students, it also limits the amount students can borrow. That means parents often have to take on a large percentage of the burden of paying for tuition. The federal government’s tuition loans for parents are called PLUS loans.

If you’re a parent contemplating a PLUS loan, your credit score won’t be taken into account. However, you can fail to qualify for a PLUS loan if you have what the lender considers to be an “adverse credit history.” Adverse credit history occurs when you are over ninety days delinquent on any other debt—student loan or otherwise—or have any Title IV debt within the last five years that has been subject to bankruptcy discharge, foreclosure, repossession, wage garnishment, write-off, or default determination.

If you are a student whose parents don’t qualify for a PLUS loan because of an adverse credit history, you may be eligible to borrow over the usual limit on Stafford loans.

Private Loans

Many students and their families need to pay more in tuition than they can take out with the federal government—and they turn to private lenders to help cover the gap. Private lenders will take your credit score, or your parents’ credit score, into account when issuing you a student loan when you are applying to a distance education college.

Banks will also assess the borrower’s future income when deciding how much to lend and at what interest rate and terms. This is one way banks assess the credit risk of student borrowers with no credit history—and you may find that a bank will issue you better terms on a loan if you’re a business or medical student than if you’re going into philosophy or fine arts.

In addition, lenders look at the borrower’s debt-to-income ratio, their credit history, and whether they’ve had any bankruptcies. It’s difficult to borrow through a private lender if your credit score is less than 650 or so.

While your credit score doesn’t have an effect on your federal student loans, it will affect your private loans—and your credit history, or that of your parents, could affect your eligibility for both. Be aware of your credit score by contacting Equifax, Experian, or Transunion for your free credit report.


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