For many students, enrolling in college is their first big life decision. It’s an exciting step toward independence, but it also comes their first real challenge of adulting—finding a way to pay for it. And with the costs of higher education on a continual upward trend , it’s likely that the number of students who seek financial aid will only increase, too.
But what if your credit score is bad, or even non-existent? It’s a chicken-and-egg conundrum—a loan can help you start to build credit, but you typically need credit to qualify for a loan. Luckily, student aid is a different beast, and it is possible to get a loan with no credit history.
Federal vs. Private Student Loans
First things first: there are various types of student loans currently available. They fall into two general categories, federal (offered by the government) and private (offered by banks and other lenders), but there are more options under each umbrella that range from differing eligibility requirements to fixed vs. variable interest rates. It can be complicated, but knowing the pros and cons of each can help you determine which option is right for you.
Federal Student Loans
Federal student loans are funded by the U.S. Department of Education and are based on education costs and your current financial situation, not your credit history.
The most desirable type of federal loan (because interest doesn’t accrue while you’re in school, like some federal student loans), the Direct Subsidized (Stafford) Loan , has low interest rates that are set each year by the government.
Subsidization means that the government will pay for any interest that accrues while you’re in school at least half-time as well as during your grace period and some deferral periods. Direct Subsidized Loans are awarded based on financial need and are only available to undergraduate students, but if you qualify they are a great option.
The other type of no-credit-required federal loan is the Unsubsidized Direct (Stafford) Loan. It also typically has low interest rates, but no subsidy means the interest starts to accrue as soon as you get your money, and you’re on the hook for all of it.
Unsubsidized loans are available to students at all levels of higher education and are therefore one of the most accessible types of student loan you can apply for. (Find out basic eligibility requirements and how much you can borrow here .)
One advantage with both types of federal student loan is repayment flexibility, including deferment, interest-only payments or even forgiveness. If you’re trying to build or improve your credit score—more on that later—repayment options that can help keep you out of default are key.
Private Student Loans
You also can apply for private student loans, which are available through some banks, credit unions, credit card companies or private lenders. The terms can be vastly different depending on the type of loan, whether you choose a fixed or variable interest rate, and for better or worse, your financial history—which includes things like your credit score.
If you’re facing less-than-stellar credit, you’ll likely need to apply with a cosigner, usually a family member or a close, trusted friend who guarantees to repay the loan in the event that you can’t. It should be someone not just with a solid financial history, but also someone with whom you have mutual trust. (Here are our tips for choosing a co-signer wisely.)
Applying for Student Loans with FAFSA
Whether you’re applying for a federal or a private loan, you’ll need to start by filling out the FAFSA® (Free Application for Federal Student Aid) form. To apply for federal loans, it’s required.
And while it’s not mandatory for private loans, the information you receive back after submitting your FAFSA form will help provide you with many of the details you need when filling out a private loan application, including how much the college expects you to contribute each year.
Filling out the FAFSA form is completely free, and doesn’t commit you to accepting any type of loan—it just tells you how much you’re eligible for from the government, and that’s a handy tool when you’re figuring out the complicated puzzle of college finances.
Parent PLUS Loans
Students aren’t the only ones who can apply for financial aid. If you’re a parent of an undergrad student who’s enrolled at least half-time, you can apply to receive aid on their behalf via the Parent PLUS Loan .
It’s another type of unsubsidized federal loan, but more restrictive in that both parents and children need to meet the minimum eligibility requirements , and undergo a credit check.
Like private loans, parents who don’t have optimal credit history may apply with a cosigner to guarantee the loan. And students are still able to seek additional unsubsidized loans for themselves to cover any gaps.
Tips For Building Credit
Entering college is the perfect time to start building your credit. Your credit score can mean the difference between getting a good deal on a loan, or not getting a loan at all. Even a few points higher or lower can impact interest rates you may be offered.
Thankfully, there are a number of sites that let you see your score for free and offer notifications if there are changes, so it’s easy to keep track of where you are.
The number that signifies good credit is between 670-739 , and it’s determined by factors such as the number of credit accounts you have open, and how you manage them responsibly. One way to build your credit is to open something kind of credit account, and then make regular payments.
Be sure to pay all your other bills on time, as well—collection accounts can have a negative impact on your score—and a good rule of thumb is to keep your credit utilization ratio under 30% to help keep your credit score in the “good” range.
Refinancing Your Student Loans
Whether you’re paying back a student loan or a parent loan, SoFi can help you save money by refinancing to a lower rate or consolidating multiple loans into one monthly payment.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.