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How Bad Credit Affects Your Financial Aid

Jun 9, 2011 Jennifer Williamson, Distance Education.org Columnist | 1 Comments

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 Loans

Private lenders will take your credit score into account when granting you student loans—as they would with any other type of loan.

Bad Credit Man and Woman

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.

 

 
Before the economic crisis, you would probably be able to get the loans you needed regardless of credit score—although your interest may have been higher. Now, it’s possible you’ll have difficulty getting private loans at all with a bad credit score, as lenders are more reluctant to loan than in the past. If you do get private loans, your interest rate is likely to be high—and there may be significant limits on the use of the loan.

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.

Federal Loans

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.

Sources

Comments:

Bad Credit Over a year ago

Well I think you are right. If you have a cosigner who has a good credit score then you can have your loan request approved.

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ABOUT THE AUTHOR

Jennifer Williamson

Jennifer worked as a GED teacher for an adult education nonprofit for two years. Her students came from all walks of life, and ranged in age from sixteen to sixty-eight. During that time, she became knowledgeable about the unique needs of non-traditional and adult learners. She counseled hundreds of students about their higher education options, including online degree programs.

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