My Credit Needs Work. What Student Loan Options Do I Have?

By
Amanda Holden
,
November 19, 2018

Between learning from tenured professors and late-night dorm parties with new friends and classmates, it’s hard to put a price tag on the experience of college.

That is, until someone puts a price tag on the experience of college.

College may be invaluable for many students, but there’s no denying that it comes with a high cost. To make it work, most students take out some form of loans.

But what do you do if your credit score needs work? What options do students have when their credit scores might stand in the way of the loans they need?

The good news is there is a solution for just about everyone. Below, we will cover the student loan options for prospective students with low or non-existent credit scores.

How to Pay For College

Before we dive into options specifically for those with credit scores that need some work, it is helpful to understand all of the available options for funding college.

First come scholarships and grants. These are the best way to pay for college, because they offer money that does not need to be repaid. It’s a great idea to exhaust all of these resources before looking at loans.

Next come student loans. While there are many kinds of student loans from all sorts of lenders, we generally break down student loans into two major categories: federal and private.

Federal loans are offered by the federal government, although you will have a loan service provider that is not the Department of Education. Loan servicers manage loans on behalf of the federal government by keeping track of and collecting payments, helping borrowers switch repayment plans, and so on.

Private loans, on the other hand, can be acquired through commercial banks, credit unions, and online-only lenders, like CommonBond.

Borrowing Options When Your Credit Isn’t Great

Most incoming freshman do not yet have a credit score. Why? Because that requires having a credit history, which most 18-year-olds don’t have. (You have to have used credit to have a credit history.)

Even if a young student were to open up a credit card and establish a credit history, the credit scoring agencies consider the length of that history. In fact, the length of history makes up 15 percent of a FICO score, putting young people and new borrowers at an immediate disadvantage.  

While having no credit score is a barrier to some prospective students, having a lower credit score is a worry for others. This could include older students or graduate students

If you have found yourself in either of these boats, there is good news. Just because your credit may not be exactly where you want it to be, it doesn’t mean that you don’t have options to pay for school.

Those with no credit history or low credit scores will want to consider the following three options:

  1. Federal student loans
  2. Private loan with a co-signer
  3. Private loan that doesn’t require a credit history

Next, we will walk through each of these three options.  

Federal Student Loans

Both Direct Subsidized and Direct Unsubsidized Loans do not require a credit score, and these loan types make up the majority of federal loans. For many borrowers, this will be a first-choice option.

PLUS Loans do require credit information if you’re a graduate student, or a parent’s credit information if you’re an undergraduate. According to the Department of Education, parents and graduates who do not meet the set criteria can consider signing with an endorser or writing an appeal explaining their extenuating circumstances. If approved for PLUS loans via one of these methods, the prospective borrower will also be required to take a credit counseling course.

To qualify for a federal student loan, prospective students must fill out the Free Application for Federal Student Aid (FAFSA). While the FAFSA does not ask for credit history information, it will use family income and other financial information to determine which types of loans applicants qualify for.

Federal loans have some benefits over private loans, such as multiple repayment plan options, loan forgiveness programs for some public service professions, and an interest rate that isn’t determined by credit score.

Federal loans also offer a grace period during the six months after a student graduates college, and options for both forbearance and deferment. While these perks used to be limited to federal loans, private lenders like CommonBond are now offering similar programs.

Private Loan with a Cosigner

In general, private lenders use credit scores to determine whether a borrower qualifies for a loan. If the borrower qualifies, credit score information will also determine the interest rate on the loan. Therefore, those with better credit scores and histories will qualify for loans with better interest rates.

For someone that is working on improving their credit score, this could present a problem. Luckily, there is a solution: Having a cosigner, such as a parent or trusted family member, on the loan.

When a person cosigns a loan, they are accepting responsibility for that loan, and that loan’s monthly payments. Because the responsibility for the loan is now shared with a party that has a longer or better history of making credit payments, the lender is more comfortable issuing a loan—and at a better rate.

Including a cosigner is also a method that graduates looking to refinance their loans can consider. Refinancing, which is the process of paying off an existing loan or loans with a new loan, is a strategy used by some grads to improve the terms of their student loans. A cosigner with good credit can help.

For those that are worried about the long-term responsibilities of cosigning a loan, there is an out: After the student has some time to build up a solid credit history and improve their credit score, the loan can be refinanced to have the cosigner removed.

CommonBond makes it even easier; borrowers can apply to have their cosigners released on a student loan after two years of on-time payments.

Customer-focused online lenders, like CommonBond, are doing a great deal to make private loans more accessible and easier to understand and pay back, and offering programs like job loss protection.

Private Loans That Don’t Require Credit History

There are some lenders willing to make loans to students that have no credit history. The tradeoff is that these loans often come with a high rate of interest, which will cost a borrower a lot of money over time.

Although every borrower has a different financial situation, this should be a last resort for most borrowers. Both federal loans (with the repayment and forgiveness options) and private loans with a cosigner (at a lower rate) are preferable to private loans with a high rate of interest.  

You’ve Got Options

When you’re a prospective student, it’s okay to have a credit history that’s nonexistent or less-than-perfect. What’s important is that you understand your loan options and make the best choice for you.

Once you’ve secured funding for school, you can spend more time doing fun stuff like researching clubs and classes and meeting your new dorm roommates. College is sure to be one of the most incredible times of your life–good luck making the most of the experience.

And in your spare time, you can work on improving you credit score too!

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