How To Get Student Loans with Bad Credit
By Travis Hornsby - CEO of Student Loan Planner
Last updated 05/06/2020
Summary: Bad credit can affect your ability to qualify for private student loans but Federally subsidized student loans don't require a credit check.
Bad credit can impact your finances in numerous ways.
It may prevent you from getting a competitive interest rate on a new line of credit and can even prevent you from getting approved.
Lenders view applicants with bad credit as high-risk borrowers.
But bad credit won’t necessarily prevent you from getting student loans.
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You may be able to use federal student loans, which don’t require a credit check. But if you need additional funding for school, private student loans may be your only option.
Unfortunately, private student loans often require a good credit history. This can make it difficult to receive a student loan offer, it’s not impossible. Find out how to get student loans with bad credit.
Apply for Federal Student Loans First
First, regardless of where your finances are, you’ll need to apply for the Free Application for Federal Student Aid (FAFSA). Federal aid through the FAFSA gives you access to scholarships and grants that you won’t have to repay. Plus, it also offers federal student loans along with other forms of federal financial assistance.
Federal loans typically have a fixed interest rate that is lower than private loans. A huge advantage about federal student loans is that you’re not required to undergo a credit check or have a cosigner on the loan.
There is one exception, however: Direct PLUS Loans. These types of loans aren’t based on financial need and include additional requirements if you have an adverse credit history.
Otherwise, if you opt for any other type of federal student loan, your poor credit won’t come into play.
Quick Tip: Federal vs Private Loans
You typically want to exhaust Federal loan options before going to private loans. Federal loans are provided by the U.S. Department of Education and offer the benefit of loan deferment and income driven repayment plans or even forgiveness. Private loans are from private lenders and generally have better rates but require a credit check.
Flexible Federal Repayment Plans
One of the primary benefits of federal student loans is having access to flexible repayment plans.
The Department of Education offers four income-driven repayment (IDR) plans. These plans dramatically lower your monthly payment and provide loan forgiveness after completing a set repayment period — currently, 20 to 25 years.
With an IDR plan, your payment is based on a percentage of your discretionary income and family size. IDR plans include:
Pay As You Earn (PAYE). Based on 10% of your discretionary income and has a 20-year repayment period.
Revised Pay As You Earn (REPAYE). Based on 10% of your discretionary income and has a 20- or 25-year repayment period, depending on whether your loans were used for undergraduate or graduate school.
Income-Based Repayment (IBR). Based on 10% or 15% of your discretionary income and has a 20- or 25-year repayment period, depending on when your first loans were disbursed.
Income-Contingent Repayment (ICR). Based on 20% of your discretionary income or what you’d pay with a fixed payment over 12 years adjusted for your income — whichever is less. And has a 25-year repayment period.
To be eligible for each of these IDR plans, you must recertify your income and family size each year. This financial information is used to determine your monthly payments for the upcoming year.
Federal Forgiveness Programs
Depending on your profession, you may be eligible for forgiveness programs unique to federal student loans. These programs include:
Public Service Loan Forgiveness (PSLF). If you work for a government or nonprofit organization, your federal Direct Loans may qualify for PSLF. To take advantage of PSLF, you’ll need to be enrolled in an IDR plan and make 120 qualifying payments. You should send your PSLF employment certification form to your loan servicer at least annually to create an extensive document trail of your work and payment history. The forgiven amount after you’ve been approved for PSLF is tax-free.
IDR forgiveness. If you’ve been on an income-driven repayment plan, but don’t work for an eligible employer, you can still work toward loan forgiveness. After you’ve made payments for 20 or 25 years, the remaining loan balance may be forgiven. However, this amount is considered taxable income so you’ll want to plan ahead for this expense.
Teacher Loan Forgiveness. If you’re a full-time teacher, you may be eligible for the Teacher Loan Forgiveness Program which includes up to $17,500 of loan forgiveness. But be aware the requirements are restrictive. You must be considered a “highly qualified” teacher and have taught at a low-income school or educational service agency for five consecutive years to receive the maximum forgiveness amount.
Because of the limitations of the Teacher Loan Forgiveness Program, many teachers would benefit more from pursuing forgiveness with the PSLF program instead.
Other Federal Loan Benefits
Federal loans offer many additional benefits and protections that you won’t find with private student loans or other forms of credit.
Did you know many private loans have better rates than Federal loans and are now offering deferment plans?
Depending on the type of loan you have, your interest costs may be subsidized. With a Direct Subsidized Loan, the government pays your interest while you’re in school and for the first six months after you leave school or graduate. This is referred to as your grace period.
There are also other protections that you may not be covered by with private student loans. Like deferment, if you go back to graduate school or need a temporary pause on your payments. Federal loans also have forbearance options for up to 12 months due to economic hardship.
How To Get Private Student Loans with Bad Credit
If federal student loans aren’t enough to pay for college, you may need to consider using private loans to fill financial gaps. But securing private student loans can be tricky if you have bad credit.
Generally, a credit score of 670 or more is considered a good credit score. To get the best rates from private lenders, however, you’ll need a credit score above 700.
Fortunately, there are options for borrowers who don’t meet these credit score preferences. Private lenders also like to see that you have a long term career (not a job).
Ways to Use a Private Student Loan:
You can use private student loan money to pay for education-related costs and living expenses like:
- Room and board
- Books and supplies
Get a Cosigner
Most lenders require a cosigner for private student loans, even with decent credit. According to the Consumer Financial Protection Bureau, more than 90% of private student loans have a cosigner. Having a cosigner becomes even more important if you have don’t have strong credit.
A cosigner uses their good credit to help you get approved for a loan and at a lower interest rate. Cosigners also share legal responsibility for paying the loan in full; they’re on the hook for repaying the loan if you fail to make payments.
Generally, cosigners are a family member, like a parent, grandparent, or spouse. It’s important that both parties understand the weight of the agreement and the expectations of making timely payments.
Some cosigners may feel more comfortable agreeing to sign for your private student loans if they know a cosigner release is available. A cosigner release removes the cosigner from any legal or financial obligations related to your student loan, after you’ve demonstrated that you can manage to make on-time payments.
The requirements for cosigner release vary. For example, the lender may require 12, 24, 36 or 48 full, on-time payments, and borrowers must meet certain income and credit thresholds before lenders will consider a cosigner release.
Also, not all private student loan lenders provide cosigner releases in their agreements. So, it’s important to fully understand your potential lender’s cosigner release policies before signing the dotted line.
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Explore Loans that Don't Require a Cosigner
Because you’re asking someone to take legal responsibility for your student loan debt, it can be challenging to find a cosigner. If you can’t find someone, there are some private lenders that don’t require a cosigner.
Look into lenders like Ascent and MPOWER Financing for private loans that don’t require a cosigner and have more relaxed credit history requirements.
Keep in mind that most lenders advertise their lowest rates. Borrowers with a poor credit history and no cosigner can expect more costly loan offers.
According to FinAid, borrowers with bad credit can expect interest rates up to 6% higher and loan fees up to 9% higher than the loan offer being advertised to prime borrowers.
If signing up for a high-interest private student loan is your only remaining option, you can work to open up doors for better rates in the future.
Plan to Refinance Your Private Student Loans After Improving Your Credit
You can begin rebuilding your credit immediately so that you’re prepared to refinance or consolidate your student loans as you approach graduation or increase your earnings.
To improve your credit, consider making interest-only payments on your private student loans while you’re still in school.
You’ll also want to:
- Pay all your bills consistently and on-time.
- Aim to pay off credit card balances each month.
- Limit your credit utilization ratio to 30% or less.
- Regularly check your credit report and dispute any mistakes.
You’ll need to shop around with multiple lenders to find the best rates and terms when you’re ready to refinance.
Remember, you can refinance private student loans as many times as you want, while also taking advantage of refinancing bonus offers along the way.
Don't Let Bad Credit Stop You From Earning a Degree
Your credit history doesn’t have to define you. You can take proactive steps to improve your credit score while using financial opportunities that are available to you at the moment.
Always maximize scholarships, grants, and federal student loans before turning to private student loans.
If you need to take out private loans as a last resort, only borrow as much as you actually need to fund gaps in your education and consider refinancing as soon as a lower rate is available.
Travis Hornsby, CFA, is Founder and CEO of Student Loan Planner. He lives with his wife in St. Louis, MO, where he loves thinking up new student loan repayment strategies and frequenting the best free zoo in America. As one of the nation's leading student loan experts, he has consulted on $500 million of student debt personally.