Paying for college is a hurdle so many young Americans and their families now face. The hunt for funds can become all the more stressful if parents and students have bad credit or no credit history at all.
If you have bad credit, there are still several ways to get a student loan. In fact, your financial aid options may barely change, if at all. Scholarships, federal loans and grants, and borrowing from private lenders are all valid choices for getting a student loan.
Student Loan Options with Bad Credit
The federal government offers some loans to students regardless of their credit scores. Apply for federal financial aid by completing the FAFSA, the Free Application for Federal Student Aid. The results will tell you if you qualify for Stafford and Perkins loans, which do not require credit checks, as well as other federally funded student aid programs.
There is a “peer-to-peer” lending option. Students can turn to particular websites that link them with anonymous investors willing to offer loans. You may be able to work out better loan terms that suit your needs with a private investor. The people offering the loans are doing so to help out students in need. Be aware that this type of a loan can be risky, as it is not as secure as a loan from the government or a widely known bank.
Students can also look into their own contacts to ask for a loan. Friends and family members in better financial positions might be able to provide you with a loan from their own resources. The terms can be more flexible, and the lender will usually be willing to work with you because he or she knows you. Even in these cases, however, be sure to write up a contract detailing the agreement.
Am I Eligible for Privately Funded Student Loans?
Private lenders use your credit score to determine if you qualify for a loan. Your credit score will signify to lenders how likely you are to repay your loan: the higher your score, the more trustworthy you are as a borrower. That’s why you’ll likely receive better loan terms — lower interest rates and longer repayment schedules — if you have a better score.
Students often do not qualify for loans on their own because their credit histories are poor or nonexistent. The most common solution for this is to use a cosigner. A cosigner agrees to pay your loan if you fail to make timely or regular payments. This can be a parent, guardian or another adult you have a good relationship with, as long as the cosigner has a good credit score.
You could also take action to build a credit history or repair it.
Can I Improve My Credit Score?
If you don’t need a private loan immediately and can delay applying for a loan by a few months, you can improve your credit score and make yourself a better borrowing candidate.
The first thing you should do is request copies of your credit reports. You can request free copies of all three of them every 12 months. Review them and dispute any errors. Once the mistakes are erased, you’ll see an immediate improvement in your score.
Reducing total debt levels and having consecutive months of on-time payments will also boost your score. Work on this for several months to further improve your score.
If you have no credit history at all, it’s still a good idea to check your credit reports. Then you can start building good credit by applying for your own line of credit, such as a department store credit card. Or you may want to ask to be added to someone else’s account. If someone you know has a line of credit with a good history, you may be able to inherit the positive history by being added to the account.
Overall, having bad credit probably won’t affect your opportunities to receive financial aid for college, but it’s a good idea to work to improve your score anyway.
Student Loans Affect Credit Score
School loans definitely impact your credit score, often in ways that will surprise you.
For example, paying off a student loan early will have a negative impact on your credit score. Education loans fall in the category of “installment loans” and paying it off early means the lender loses out on interest payments.
Not making payments on time is an obvious negative mark on your college loan, but it can be turned into a positive. If you are having trouble making payments, ask for a deferral or forbearance, neither of which will hurt your credit score. And when you bring your account up to date, it will improve your score.
Another way to improve your score is to make interest payments on the loans while you’re still in school. Also, you have a six-month grace period after graduating to begin making payments, but if you start earlier, that can have a positive impact on your score.
The most critical factor with college loans is to make certain you don’t default. This can ruin your credit score and stay on your report for seven years.
It makes sense to ask for a free credit report every year to make sure your payment history for education loans is being reported accurately.
Student Loan Debt?
You can consolidate your loans or get your loans forgiven.