Student Loans and Poor Credit

Student Loans and Bad Credit

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From the prospect of campus life to the thrill of higher education, getting ready to enter college or planning a continuing education program should be an exciting time. Unfortunately, though, money matters such as getting a student loan can often overshadow the excitement. Deciding how that financial burden will be shouldered can be stressful for both parent and student, and you'll have to do some homework before filling out the student loan application.

That's why it's critical for you to understand how your credit can affect your ability to get a student loan. Having "bad" credit can mean the difference between celebrating a college graduation and lamenting what might have been.

Student loan options for students with poor credit

For students with a poor credit history, obtaining a student loan is still possible. Through the U.S. federal government, there are two types of loans for students with bad credit, the Federal Perkins Loan and the Subsidized Stafford Loan. The Federal Stafford Loan is available as both a subsidized and unsubsidized loan, depending on the student's needs. These recognized types of federal student loans are available through the Federal Family Education Loan Progam (FFELP). And it is important to remember that the money you borrow through this and many other educational loan programs must be used for school costs, including tuition, room and board, books and supplies.

The four most common federal education loans are:

  1. Subsidized Stafford Loans are made directly to the student, with interest rates available as low as 3.6%. You do not need to start paying back this loan until six months after you graduate (the government will pay any interest on the loan before that) or until six months after you decide not to continue your course of study on at least a part-time basis ("part-time" meaning at least half of a regular course load, as determined by your school).
  2. Unsubsidized Stafford Loans are made directly to the parents of dependent undergraduates, but at slightly higher interest rates, which can still be as low as 4.2%. These loans are not based on need or income. The difference (as compared to subsidized loans) is that you must pay interest on the loan while you are in school.
  3. Federal PLUS Loans are made directly to the parents of a dependent undergraduate student, and are primarily geared towards parents who do not have bad credit. In fact, you are very unlikely to get a federal PLUS loan if you have an adverse credit history.
  4. Federal Perkins Loans also offer low interest rates (about 5%). They are designed, however, for students with "exceptional" financial needs.

Private loans for students with bad credit

Unlike with most federal loans, when obtaining personal loans, your credit rating will be scrutinized during the application process to obtain a private student loan. And if your credit score is determined to be potentially "bad" (usually somewhere below 700), your application will simply be denied, or you will have to pay the loan back at a much higher interest rate — as high as 10% in some cases, depending on the amount and duration of the educational loan.

So what's a student to do?

How do you get a personal student loan if your credit rating is "bad"? Since it's difficult to find a definitive measure of "good" and "bad" credit (although a score of 700 and over is generally considered "good"), the more appropriate question might be, "How quickly do you need a student loan?"

If, for example, you need to secure an education loan ASAP, you are likely to pay a higher interest rate, although you can try to refinance the loan down the road at a lower rate. In any case, it's probably a good idea to assess your overall credit status and check your credit score.

In the end, while the journey to secure a student loan may prove challenging, the reward of a college degree can be well worth the effort. To help reach your educational goals, start by safeguarding your financial ones. And take steps towards maintaining good credit today.

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