One of the most popular questions we receive via email is – “Where can I get a student loan with bad credit?”
The good news is that in 2014, bad credit student loans are more widely available than ever before, meaning that even people with previous bankruptcies, defaults and late payments will be able to qualify for student loans.
And while we advocate Avoiding Student Loan Debt entirely, we realize that the extreme costs of going to college make it virtually impossible to do without taking out some form of student loan.
Fortunately, the most affordable form of student loans, Federal student loans, are also the easiest to obtain for people with credit problems.
In fact, the Federal Government is the number one provider of bad credit student loans, and by a wide margin.
Federal Student Loans for Bad Credit
When determining eligibility for Federally-funded student loans (in most cases), your credit score, credit history, bankruptcy history, defaulted loans or other credit-related problems aren’t even taken into account.
In fact, the first step to getting Federal Student Loan is to fill out the FAFSA – the Free Application for Federal Student Aid – and in that paperwork, you won’t even be asked to submit any credit information at all!
Should you qualify for Federal assistance (virtually everyone does), you’ll be offered the opportunity to take out Federal Stafford Loans, Federal Perkins Loans, or some other form of Federal Direct Loan, which won’t require any credit checks of any sort.
Advantages
Federal Student Loans are far more forgiving than Private Student Loans, because they’re more affordable, easier to pay off, and substantially easier to get out of paying back.
Specific advantages to Federally-funded bad credit student loans include things like:
- Fixed interest rates
- Better Student Loan Forgiveness options
- Easier opportunities to file for Deferments and Forbearance
- Lowest interest rates for people with terrible credit scores
Even if you don’t have credit problems, Federal student loans are probably going to end up being more affordable, safer, and more reliable than Private student loans.
Disadvantages
The downside to Federal student loans is that they require a lot of paperwork, a long time to process, and they don’t offer as much money as Privately-funded loans.
If you need to borrow tens of thousands of dollars, or hundreds of thousands of dollars, then you might not be able to fund it all via Federal student loans.
However, don’t write them off immediately if you’re in need of serious coin, because the limits are set at different amounts depending on need, and some borrowers will be able to get a lot of money from the Federal Government.
Which Federal Student Loans Don’t Use Credit Scores?
There are two different types of Federally-funded student loan that won’t use your credit score in any way:
- Stafford Loans
- Perkins Loans
In fact, Stafford loans and Perkins loans won’t require any sort of credit check, so no matter how bad your financial situation might be, you should still be able to qualify for one of them.
Which Federal Student Loans Do Use Credit Scores?
The PLUS Loan program does take credit into account, though in a relatively simple way.
While Private loans would set your interest rate based on your credit score, the PLUS loan is structured in an entirely different way.
To qualify for a PLUS loan, you cannot have an “adverse credit history”, meaning that if you’ve got serious credit problems, you won’t be able to qualify for one at all.
Things that would label you as a person with an “adverse credit history” include being more than 90 days late paying off any debt, or having a Title IV debt within the past five years that was subjected to:
- Default determination
- Bankruptcy discharge
- Foreclosure
- Repossession
- Tax lien
- Wage garnishment
- Write-off
Private Student Loans for Bad Credit
Should you not qualify for Federal loans, not be able to raise enough money via Federal loans, or simply not want to take out a Federal loan for some other reason, you’ll have to rely on Private lenders.
While we almost always advocate attempting to borrow from the Government first, there are cases where Private lending makes more sense, so don’t immediately write them off without doing some investigation of your own.
Private lenders offer a variety of packages featuring student loans with bad credit, from loans that come with high interest rates, to loans with variable interest rates, to loans that require a great deal of collateral, or complicated repayment schedules.
Advantages
The biggest advantages to borrowing privately is that you can get more money, more quickly.
If you’ve failed to fill out a FAFSA in time for the upcoming semester, but you need to pay for school and have to raise the funds in a short time-frame, then private borrowing might be your only option.
Additionally, if you’ve already maxed out your Federal line of credit, and can’t get the Government to issue you any more funding, then you might need to call a private lender instead.
Whether you’ve got great credit, or terrible credit, Private student loans can be taken out quickly, and in large amounts, making them the best option for certain borrowers (but not everyone!).
Disadvantages
The disadvantage to taking out a bad credit student loan from a Private lender is that your credit score will definitely be taken into account, meaning that your loan will end up being more expensive if you have credit issues.
In fact, if you’ve got a terrible credit score, then you may not be eligible to borrow in the private space at all, or in a way that would make it worth borrowing in the first place (because your interest rate would be astronomical).
If your credit history is full of late payments, defaults and bankruptcies, you may have serious trouble finding a Private lender willing to offer you any funds at all.
How do Private Lenders use Credit Scores?
Virtually all private lenders will incorporate your FICO score (the official name for a credit score) into their decision on whether or not to lend you money, and under what conditions.
In addition to credit scores, things like your debt-to-income ratio and recent bankruptcies will also affect your ability to receive a loan, but let’s focus on credit score for now.
First, here’s some basic statistics about private student loans and credit scores:
- Borrowers with FICO scores below 630-650 might have trouble receiving a private student loan
- 85 – 95% of private borrowers have a credit score of 650 or higher
- 21% – 25% of private borrowers have a credit score of 760 or higher
Credit Scores & Interest Rates
Most borrowers will determine interest rates and fees based on your credit score, offering lower interest rates, and lower fees, to those borrowers with the best credit scores.
Conversely, if you’ve got a terrible credit score and a poor credit history, you will be faced with higher interest rates, higher fees, or you might not even be able to borrow at all.
In fact, FinAid reports that:
Borrowers with bad credit scores may have monthly payments that are 20% to 40% higher and pay two-thirds to 100% more interest over the lifetime of the loan as borrowers with excellent credit scores. That’s as much as double the interest!
Given these facts, it’s extremely important that you protect, defend and do whatever you can to improve your credit score before applying for a private student loan.
Credit Scores & Loan Limits
Borrowers with better credit scores won’t have much trouble (if any) receiving large student loans, but those with lower scores will likely face limits on how much money they can get from a private lender.
In fact, if your credit score is too low, it’s possible that you won’t be able to acquire a loan at all, and you might have to rely on a cosigner, or some form of collateral, in order to get any financial assistance from Private lenders.
Appealing a Loan Denial
If you’ve been denied a loan from a private lender, you should ask them about their appeals process, since it’s possible that you’ll be able to re-apply and receive an approval once you’ve proven that you’re truly serious.
Sometimes private lenders will offer bad credit student loans to borrowers who can prove that their financial situation isn’t really their fault, isn’t likely to occur again, or won’t impact their future ability to repay their loan in full and on time.
Improving Loan Terms
If you’ve been offered terrible loan terms, or been completely denied a loan, then it’s time to look at additional tactics like leveraging a cosigner (someone with good credit who will vouch for you, making themselves responsible for your loan as well), or checking out alternative funding options.
What Should I Do?
There’s only one good answer to this question – and it requires some serious homework.
Fill out a FAFSA, find out what type of Federal aid you can qualify for, then compare that to whatever you’re able to find offered by Private lenders, and choose the loans that will save you the most money in the long-run.
There’s no two ways about it – going to college is an expensive proposition, but even though it costs a lot of money to get that degree, it’s one of the only remaining avenues to finding secure, long-term employment, so you might just have to bite the bullet, buckle down, and get it done.
But don’t be foolish!
Taking out too much money, borrowing in the wrong way, and agreeing to disadvantageous loan structures can crush you with excessive debt, leading to years and years of excruciating stress.
Be careful out there!
By: Tim Marshall
Tim's experience struggling with crushing student loan debt led him to create the website Forget Student Loan Debt in 2011, where he offers advice, tips and tricks for paying off student loans as quickly and affordably as possible.