Does Bad Credit Affect Student Loans?

June 18th, 2010

We all know that going to college is very expensive. So it comes as no surprise that very few people actually have the means to pay for college out of their own pockets. For the vast majority, financial aid will have to come into play in order to pay for tuition, books, and other expenses related to your education. there even are specific student loans for living expenses, as they can also turn out to be pretty steep.

Besides the grants and scholarships, student loans are the most common type of financial aid. There are many loan programs out there, and more often than not, you will find a way to pay for school. But there’s one thing that’s as important as your grades when you set out to get student loans. It’s your credit score.

What’s Your Credit Score And Why Does It Matter?

The most widely used credit score is the FICO score, which is calculated statistically, with information from a consumer’s credit files. Thanks to this calculation, financial institutions in general can get an idea of how much of a risk you are and they make their lending decisions based on that information. FICO scores range from 300 to 850 and the higher the number, the better your credit is.

Your FICO Score is calculated from five components:

Paying on time (35 percent)
Amount and type of debt (30 percent)
Length of time you’ve been using credit (15 percent)
Variety of accounts (10 percent)
Recent credit activity (10 percent)

The reason why your FICO Score matters is that any financial institution you approach for student loans is going to take a look at your credit score to determine your creditworthiness. That’s going to play a big part in what loans you get and what interest rate you’re charged. It’s true that whether you have good or bad credit, you will find a student loan package that caters to your needs, but it’s also true that bad credit student loans come with steep penalties and higher interest rates compared to other student loans. In any case, this information helps you know what to do to make your credit better in the future.

What You Can Get From Bad Credit Private Student Loans

If you have bad credit, looking for private student loans carries a certain price tag. A “private” student loan is simply a loan that is not financed by the Federal government; you get it from a bank or credit union. So they typically have stricter requirements even for people with good credit.

You will find that those companies do have specific student loans for people with bad credit. If they do, it’s because they know there is a market and they’re ready to service it. So before they decide to approve your bad credit student loan, they will take a look at your credit history and purchase your score. But most of the time it’s not to deny or approve the loan. Rather, it’s to assess the level of risk they’re about to take. Depending on how bad your credit is, the interest rate can go from being* comparable to other loans of the same category to being much higher.

What You Can Get From Federal Loans For Students With Bad Credit

Since private lenders offer higher rates to students with bad credit or no credit history, many students turn to Federal Direct Loan programs for assistance. Federal loans such as the Federal Stafford and Federal Perkins are government programs developed for students with bad and good credit. The Federal government insures these loans; thus, bad credit students can qualify for very low interest rates.

Other Things To Consider With Bad Credit Student Loans

Keep in mind that with student loans you aren’t guaranteed that the same loan company will give you a loan for your second year. Many students overlook the fact that student loans only go one year at a time. Even if your credit is bad now, you can always fix it so that you qualify for a better student loan (without a cosigner) next year. Conversely, try avoiding to make your credit worse if it’s already bad. That will only make it harder (and more expensive) for you to get a student loan next year.