For many people, the road to financial stability can feel like a paradoxical hamster wheel.
In order to be financially stable, it helps to get an education. In order to get an education, it helps to take out a student loan. In order to take out a student loan, it helps to be financially stable.
Thankfully, this road has more than one on-ramp. Here are some options for students and parents with poor or no credit to get a student loan.
Of course, the first step should be applying for as many scholarships as you can and exploring options to cut college costs, such as considering employer tuition assistance programs and choosing an affordable school.
Apply for Federal Student Loans
When bad credit is an issue, either for students or parents, the best option is for the student to take out federal loans. Federal student loans don’t require a credit check for students, and are available to all students who attend an accredited school, are 18 or older and have US citizenship or a green card. They also offer the same interest rate for all borrowers, regardless of credit score.
Undergraduate students can borrow up to $31,000 in federal student loans if they’re still financially dependent on their parents, or $57,000 if they’re independent. Almost all students qualify as dependents.
Students can apply for federal loans by filling out the Free Application for Federal Student Aid (FAFSA). This form asks for each parent’s income and asset information, but doesn’t look up their credit score or credit report.
Unfortunately, the federal government does perform a credit check for parents who want to take out federal loans for their children. Parents may be denied for federal Parent PLUS loans if their credit report shows a default, bankruptcy, foreclosure, repossession, tax lien, wage garnishment or other adverse event within the past five years.
Use Private Loans as a Last Resort
Private student loans should only be used if you’ve maxed out your federal loans and applied for all eligible grants and scholarships. Not only are private loans harder to qualify for, they also don’t offer the same protections that federal loans do.
Lenders who offer private student loans will always perform a credit check, so students will usually need a co-signer. This is someone who will take financial responsibility for the loan if the original borrower defaults. The co-signer typically must have good credit for the borrower to be approved.
If the borrower and co-signer both have bad credit, the lender may deny the application or charge interest rates as high as 13%. For reference, current interest rates for federal student loans are 4.53% for undergraduates and 7.08% for parents.
What Graduates Can Do
Less-than-desirable loan terms don’t have to plague borrowers for the entire duration of the loan. A student that had bad credit and private student loans may refinance them to a lower interest rate once they graduate – assuming their financial situation has improved.
A graduate with a full-time job and an excellent credit score may qualify for much lower rates than they did as an 18-year-old. With a high credit score and low debt-to-income ratio, they may be able to refinance private student loans to rates equal or even lower than those of federal loans.
Keep in mind refinancing federal student loans means you’ll lose many irreplaceable benefits, including an option for student loan forgiveness, the ability to make payments based on your income, potential for widespread loan forgiveness, and generous options to pause payments in time of unemployment and economic hardship.
The ChangEd app helps student loan borrowers pay down their debt faster. Link your credit and debit cards and with every purchase you make, the total is rounded up, and that “spare change” is added to your student loans. You can also earn points for potential free payments. Read our review to learn more.
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