Federal student loans do not require a credit history but do have borrowing limits that could mean filling gaps with co-signed private loans.
March 5, 2021 – By Coryanne Hicks
Your credit history doesn’t need to be a barrier between you and your education: Even borrowers with bad credit or no credit can find student loans. You may not even need a co-signer, although the backing of someone with good credit may improve your chances of approval and your interest rate.
This guide will tell you everything you need to know to help you qualify for a student loan with less-than-perfect credit.
What to Consider When Selecting a Student Loan for Bad Credit
Getting a student loan is harder with bad credit. You must consider all of the usual factors, such as interest rates and loan limits, as well as others specific to your situation.
Here are the most important criteria when selecting student loans for bad credit:
- Consider a co-signer. If you have bad credit, a co-signer – someone who can make payments if you don’t make them – should expand your private loan options, says Madison Block, marketing communications and programs associate at the nonprofit American Consumer Credit Counseling. You can look for student loans that offer a co-signer release, which removes the co-signer from your loan once you’ve made a certain number of on-time payments.
- Consider the effects on your already low credit score. Although not all student loans require credit checks, most private lenders take your creditworthiness into account. If you have bad credit, you may only qualify for high interest rate loans.
- Consider the interest rates of the student loans you’re considering, Block says. While some lenders may not factor in credit scores or require co-signers, they could charge higher interest rates than those that do, she says. Meanwhile, lenders that advertise very low interest rates generally require excellent credit and charge higher rates for applicants with bad credit.
- Consider the repayment options. If you think you might struggle to make payments, look for lenders with flexible payment options, which could include extending your repayment term or refinancing to lower your payment, as well as deferment or forbearance plans. Private student loans are generally less flexible than federal student loans, which include several flexible repayment options.
- Consider the loan’s total cost. “Make sure you are doing your homework on the total costs of your loan over time and not just choosing based on interest rate alone,” says Brandon Ashton, director of retirement security at Cornerstone Financial Services, Southfield, Michigan. “Sometimes fees and charges can offset a good interest rate.”
- Consider refinancing in the future. As you build a credit history and hopefully improve your credit score, you may be able to refinance your private student loan to a lower interest rate, Ashton says. If you find a better refinance option, check whether your current lender is willing to beat that competing offer, he says.
How to Get a Student Loan With Bad Credit
If you have bad credit, being strategic about the student loans you apply for is important. Because applying for several loans in a short time period can hurt your credit score, target lenders that you think are the best fit for you. Funding U and Ascent, for instance, offer private student loans and look at factors such as GPA, major and graduation date when borrowers can’t qualify based on credit and income.
Whether you want a private student loan or a federal loan, you can apply for many of them online. When you do, you will need to provide personal information, such as your address and Social Security number or alien registration number. If you’ve lived at your current address for less than one year, you will also need to list your previous residence.
The application will ask about your school and your degree, as well as any financial aid or scholarships you expect to receive. Have your federal tax information or tax returns ready, and be prepared to provide details about bank accounts, investments and monthly mortgage or rent payments. You will also need to name two personal contacts who are not your co-signer, if you have one.
Before you apply for a student loan, though, you will need to decide how much you want to borrow. Estimating your educational expenses, including tuition and fees, housing, food, and books, can help you do this. Also, your financial aid award letter should include your school’s one-year cost of attendance.
You can then start by applying for federal student loans – having bad credit or no credit will not disqualify you. Federal loans, except for Direct PLUS loans, don’t take your credit history into account, making them better options for applicants with bad credit.
They also tend to offer lower interest rates and greater repayment flexibility and forgiveness options than private student loans. Federal loans don’t require payment until after you graduate, leave school or decide to enroll less than half-time, but many private lenders will expect payment while you’re still in school.
You’ll need to complete the Free Application for Federal Student Aid, or FAFSA, at fafsa.gov or on the myStudentAid mobile app to be considered for federal loans, grants or work-study awards. The application becomes available each October for the following school year, but every school and state has its own FAFSA deadline.
Make sure you meet not only the federal filing deadline but also state and college FAFSA deadlines because aid is limited. Most state deadlines can be found at the FAFSA website, but also check your school’s website for deadlines.
You should receive a financial aid award letter in mid-March to April if you are a regular decision applicant. Your college will explain how to accept all or part of your aid.
“If federal loans aren’t an option or you’ve exhausted your federal loans, then consider applying for a private loan with a co-signer who has good credit,” Ashton says.
Having a co-signer who will make payments if you don’t can help you get a good interest rate with a reputable lender, he says. Still, make sure you shop around for the best offer. You might only be approved for high-interest loans, or your application could be rejected, depending on your credit score.
When applying for private student loans for bad credit, the most important factors to evaluate are the repayment period and interest rate, says Josh Simpson, financial advisor with Lake Advisory Group. Many private student loans will need to be paid while you’re in school, but some lenders may offer deferred payments.
Some may allow you to defer payments for six months after you graduate or when you enroll less than half-time. Ask lenders about their repayment options.
If your loan is approved, the next step for all private and federal loans is school certification. During this process, the school confirms your cost of attendance, financial aid eligibility and other loan details. Your school also checks that your loan amount isn’t more than the total cost of attendance, minus any loans or other aid you’ve received.
Certification will include your school setting a date to receive the money. The entire process typically takes seven to 10 days but can be longer, depending on time of year and school.
How to Build or Improve Your Credit Score Before Applying for a Student Loan
If you have bad credit and know you will need a student loan, improving your credit score before applying is a good idea. Luckily, there are many ways to build your credit and boost your score.
But this won’t happen overnight. If you have no credit, you will need at least six months of credit usage to generate a FICO credit score, according to FICO, the credit analytics firm.
A score damaged by serious misuse, such as a foreclosure or bankruptcy, can take years to recover. On the other hand, a poor credit score could improve to fair with only 12 months of responsible use.
Whether you are trying to raise your credit score or build credit history, these expert-recommended strategies can help before you apply for a student loan:
- Pay your bills on time and in full every month. “The most important factor in determining credit scores is payment history,” Block says. “Unfortunately, it can take a few months for your score to improve if your credit history isn’t good to start with.”
- Consider a secured credit card. Secured credit cards work like traditional credit cards, except the credit limit is secured by a deposit you make when you open the account. The deposit is usually equal to your credit line and can be used to pay your account if you don’t. “Consumers with low or no credit score may have trouble qualifying for a standard credit card,” says Paramita Pal, head of U.S. Bankcard at TD Bank. “In those instances, you may want to consider a secured credit card. Secured cards report to the credit bureaus, so proper use will help a score improve over time.”
- Ask someone with good credit habits to add you as an authorized user to a credit card. The primary cardholder is responsible for payments, but the account – and payment history – will appear in your credit file. Make sure you are piggybacking on the credit of a friend or family member you trust because his or her actions – good or bad – will be reflected in your credit history.
- Take out a credit-builder loan. Unlike a traditional loan, a credit-builder loan deposits money into a savings account rather than giving it to you upfront. You won’t be able to access the money until you’ve repaid the loan, and then the lender will return it to you, plus any interest. Typical loans are $300 to $1,000, and borrowers pay in installments over six to 24 months, according to the Consumer Financial Protection Bureau.
- Lower your credit utilization rate. Reducing the percentage of total available credit you’re using, called your credit utilization rate, is one of the fastest ways to improve your credit score. Amounts owed, which accounts for your credit utilization rate, is the second-largest factor in your FICO score. The general guideline is to use less than 30% of your credit, if possible. If your available credit is $1,000 and you spend $500, your utilization rate would be 50%. You can reduce your rate by using less credit or asking for a credit limit increase: Just be careful not to spend more at the same time.
- Avoid carrying balances on your credit cards. Another way to improve your credit score is to pay off card balances. “But do not cancel cards you aren’t using regularly,” Pal says. Length of credit history is another important factor in determining your credit score, according to FICO. A longer credit history will increase your FICO score, Pal says.
“Finally, it’s important to keep an eye on your credit report to ensure the credit agencies have accurate information on your balances, number of credit lines,” she says. “Inaccuracies can hurt a credit score.”
The three national credit bureaus – Equifax, Experian and Transunion – are offering free weekly credit reports through April 2021 to help you monitor for errors and signs of fraud during the coronavirus pandemic. You can access them at AnnualCreditReport.com; previously, you could get one free credit report yearly from each credit bureau.
“Request your reports throughout the year and review for any errors,” Pal says.
If you think you spot an error on your credit report, you will need to dispute the information by contacting both the credit bureau and the creditor.
Can You Get a Student Loan Without a Co-Signer If You Have Bad Credit?
You can get a student loan without a co-signer if you have bad credit or no credit – most federal loans do not require a co-signer – but private loans often do.
Unlike need-based federal loans that are funded by the government, private student loans from banks, credit unions and online lenders require a credit history to prove that you can pay back the debt. Many students have thin or no credit histories, which makes approval difficult for private loans.
A creditworthy co-signer on a private loan can help your chances of approval and secure a better interest rate than you would on your own.
If you don’t want a co-signer on your student loan permanently, look for a loan with a co-signer release. This would allow you to release your co-signer from the loan after you meet certain requirements, such as making a certain number of on-time payments.
Can You Get a Student Loan With No Credit?
Borrowers with no credit can get student loans, Simpson says. Federal student loans are the best choice because they don’t require a credit history.
But, adds Ashton, “They have limits on how much you can borrow.”
Federal loan limits depend on the type of loan, as well as your year in school and your dependency status. Generally, graduate students can borrow more than undergraduates: Annual loan limits range from $5,500 to $12,500 for undergraduates and $20,500 for graduate students.
Private student loan limits depend partly on your credit score and vary by lender. Citizens Bank, for instance, limits undergraduate loan amounts to the full cost of your education, up to $150,000 total. Meanwhile, PNC caps loans at $50,000 annually, with a maximum aggregate educational debt of $225,000.
What Is the Minimum Credit Score for a Student Loan?
Most lenders require a credit score of 650 to 670 for a private student loan, but some don’t have a minimum credit score. Instead, they base credit decisions on several factors, such as debt-to-income ratio, earning potential or household income.
Parents who want Direct PLUS loans won’t need to meet a credit score minimum but cannot have an adverse credit history. That means you can’t have debts that are 90 days or more delinquent or in collections, among other credit mistakes.
Does Applying for a Student Loan With Bad Credit Lower Your Score Even More?
Applying for a private student loan will lower your credit score, but the damage should be minimal and temporary, as long as you don’t apply for too many loans at once. A new loan results in a hard inquiry on your credit report, which means a creditor has requested to review your credit file to assess your risk as a borrower.
“Having too many hard inquiries in a short amount of time can decrease your score,” Block says.
But one or two inquiries per year, she says, should not significantly affect your credit score. For most people, one credit inquiry will drop your FICO score by less than five points. That’s different from applying for several credit cards and a loan in one week, which may indicate financial problems.
The stronger your credit history, the better your credit score will tolerate a credit inquiry. Your score will bounce back within a few months if everything else in your credit history remains positive.
If your credit is less than perfect, the effect of inquiries will still be short term. Inquiries remain on your credit report for two years, but FICO scores only consider the ones from the last 12 months.
Do All Student Loans Require a Credit Check?
Not all student loans require a credit check. “Federal student loans don’t take credit history into account like private student loans do,” Block says.
This means that applying for a federal student loan won’t result in a hard inquiry on your credit report. Parent PLUS loans are the exceptions.
If you can’t get enough federal help to pay for college, then consider private student loans. Adding a co-signer should help you qualify for a loan and pay a lower interest rate than you would on your own, Block says.
Private lenders may use a soft credit inquiry to preapprove student applicants. Soft inquiries, unlike hard inquiries, will not hurt your credit score. That said, a poor credit history will affect your chances of approval.