How Bad Credit Affects Your Financial Aid
Your credit score is measured in a single three-digit number between 300 and 850. If your credit score is lower than 650, it’s considered “subprime.” Lenders use this number to decide whether to lend to you at all, and at what terms and interest rates.
Credit scores are determined based on a variety of factors, including payment history, amounts owed, the types of credit used, and the length of payment history. The higher—and better—your credit score, the less chance lenders will see you as a risk. A good credit score means access to bigger loans on better terms. A low credit score could mean difficulty getting a loan at all—and high interest rates when you find a lender who will
If you’re a student who needs financial aid, your credit score could affect the amount of aid you get. But not in all cases.
Private lenders will take your credit score into account when granting you student loans—as they would with any other type of loan.
Getting a private student loan is harder than it used to be—and your credit score will make a big difference in the amount, conditions, and interest rates of the loans you can get.
In general, it’s unlikely you’ll be able to get a private student loan if your credit score is below about 630. Most people who are successful in getting student loans have credit scores of 650 or higher; a quarter have scores of over 760. If you’re a traditional student with no credit history, private lenders will use your parents’ credit history.
There is a small segment of private education funding that doesn’t assess your eligibility based on credit scores. MyRichUncle, for example, offers student debt assessed based on your major, GPA, college reputation and number of years in school—your credit history and your parents’ don’t factor in. In addition, some lenders provide colleges with “opportunity loans,” which are private funds that schools can lend to students without assessing credit history.
If you’re applying for a Stafford or Perkins loan, your credit score will not affect the loan. This is also true for PLUS loans, but to qualify for a PLUS loan you must not have an “adverse credit history.” This is defined as being over 90 days past due on a debt or having Title IV debt within the past five years, subject to foreclosure, bankruptcy discharge, repossession, wage garnishment, or tax lien.
If your parents are applying for you and have an adverse credit history, you may be eligible for higher unsubsidized Stafford loans.
How to Improve Your Chances
The easiest way to improve your chances of getting a loan is to have a cosigner. The cosigner takes responsibility for the debt, essentially putting the loan in his or her name. If your cosigner has a better credit rating than you do, you could have a much easier time getting loans—and earn a lower interest rate when you do. If you’re a traditional college-age student, your parents will probably cosign for you automatically during the process.
You can also get a better interest rate in some cases by promising to make payments while you’re studying. While most private lenders expect you not to start payment until you graduate, interest usually still accrues, and many lenders will give better rates to borrowers who agree to repay the loan immediately or start paying the interest before graduation.
Getting a private student loan is harder than it used to be—and your credit score will make a big difference in the amount, conditions, and interest rates of the loans you can get. For federal aid, your credit score won’t have an impact—although the type of debt you have and your debt history will, with PLUS loans. Know your credit score—or your parents’ credit scores—as you shop around for loans, and do everything you can to avoid private loans if possible. If you do, you’re more likely to have a more manageable debt burden when you graduate.
More About Financial Aid
- Can You Hurt Your Chances for Federal Financial Aid By Saving Too Much for College?
- In a Same-Sex Marriage? How Your FAFSA Will Change in 2014
- How Your Federal Student Aid Will Change in 2013
- Do Younger Children Get a Better Deal on Student Aid?
- Senior Citizens and the FAFSA: Getting Federal Aid When You're Over 60
- Can Your Credit Score Affect Your Federal Aid?
- Tuition Aid for International Students: The Funding Landscape
- Major Changes to Your Federal Student Aid in 2012-2013: What's Ahead