Maybe you’re finishing up high school and haven’t established any credit yet, or maybe you’re an adult returning to school after facing financial challenges that are reflected in your credit score. You may be asking yourself this question: “Can I get a student loan with bad credit?”
Read on to learn more about the different types of student loan funding, ranging from federal loans to private ones. We’ll also discuss how your credit rating may factor in for each type of loan.
We’ll also reverse engineer how and why credit scores were created, describe how lenders typically use them in their lending decisions, and share tips that could help you boost your credit score.
Getting a Student Loan
Federal Student Loans
When applying for most federal student loan programs , the status of your credit is not a factor. The exception is if you are in default on an existing federal loan, that may hinder your ability to qualify for more federal funding. In order to take out federal student loans, you first need to fill out the Free Application for Federal Student Aid (FAFSA®). If you are a dependent student , you will also need your parents to fill out their portion of the FAFSA.
Not sure if you’re a dependent student or not? You very likely are if you are under the age of 24, even if you are financially independent and even if your parents don’t claim you as a dependent on their tax forms any more.
If you’re under the age of 24, there are a few ways you wouldn’t be considered a dependent student including if you were legally emancipated, are an orphan, are married, are an armed services veteran, or currently serving active duty, are homeless, or if you have legal dependents other than a spouse.
Once you’ve submitted the completed FAFSA, you then become eligible for both Direct Unsubsidized Loans and Direct Subsidized Loans.
Subsidized Federal Loans take financial need into account and, if you’re awarded some of these dollars, the federal government will pay the interest that accrues on your loan while you’re attending college. So, the principal amount that you initially took out will be your starting loan balance when you graduate. Unsubsidized Federal Loans don’t take credit history or your financial need into account, and you are responsible for paying any interest that accrues—including while you’re in school and during times of deferment or forbearance.
Another type of federal loan is called the PLUS Loan, and it’s available to parents of students if they want to help fund their children’s college education. It’s also available for graduate/professional students. According to the Department of Education, all Direct PLUS Loan applicants go through a credit check, because a qualification of the loan is that the borrower can’t have an “adverse credit history .”
Private Student Loans
If you find that sources of funding like federal student loans, scholarships, grants, or earnings from work-study will not be enough to fund your education, then private student loans are another option to consider.
But, private lenders are more likely to rely on credit scores and credit history when determining whether or not they will lend to you. So if, for example, you currently have a poor credit score, or not enough credit history, you may need to apply with a cosigner, such as a parent, who has solid credit. And, if you haven’t really established your own credit history yet, a private lender will also likely want a cosigner for at least two reasons:
• There is scant record to demonstrate how responsibly you would pay back a loan
• About 15% of your FICO® Score is based on the length of your credit history (and 90% of lenders use your FICO Score when considering you for a loan)
Development of Credit Scores
Credit scores were first developed by the three major credit bureaus and the Fair Isaac Corporation (FICO) in the late 1980s and have now been widely adopted by the financial industry. Before the development of such scores, lenders needed to slog through credit reports that were sometimes pages long, and then make lending decisions that, at least in part, were based on these reports. Under that system, it was easier for the biases of lenders to play a role in lending decisions.
With credit scores, information is quickly summarized, and lenders can establish objective requirements about what type of credit is needed before a cosigner is required and/or a loan can be approved.
How Credit Scores Are Used
When you apply for a loan, about 90% of lenders refer to your FICO Scores as a sort of risk “litmus test.” If the loan is approved, the bureaus will be informed. The credit bureaus use all this information to inform algorithms that determine your credit score.
Now, let’s say you apply for a private student loan. The lenders will review your application, including your credit score, and they can approve it, deny it, or offer you something different from what you requested.
Lenders will likely look at your credit score, as well as factors like how many loans you currently have, your inquiry history, your payment history, and the amount of time in which you’ve responsibly used credit.
Boosting Credit Scores
Thirty percent of your FICO Score is based upon how much money you owe. This means that reducing your debt may help improve your creditworthiness. These tips can help you get ahead of your credit card debt and help you focus on improving your credit score:
• Prioritize paying off your credit card balance monthly.
• Consider reducing your interest rate by consolidating credit card debt into a personal loan.
• Snowball down the debt! With this method, if you have debt spread across multiple credit cards, you’d start by paying off the account with the smallest balance while making minimum payments on the rest. Then move to the next smallest bill, paying as much as you can on that one until it’s paid off, and so forth.
• If you’re determined to spend less on credit cards, you can switch to paying with cash.
Another tip: Credit utilization accounts for 30% of your FICO Score. For those who are credit card debt-free, looking into raising credit card limits such that less of the credit available is being used could be a smart idea.
Refinancing Student Loans with SoFi
Once you have completed your degree and taken steps toward improving your financial fitness, you can think about refinancing. At SoFi, when you refinance your student loans into one payment, you may also benefit from a lower interest rate.
You will also be able to choose from fixed and variable rates. If you’re keen on lowering your monthly payment, you can also potentially refinance for a longer term. (But keep in mind that extending your loan term means you’ll pay more interest over the life of your loan.)
SoFi is one of the few lenders that consolidates and refinances federal and private student loans together—and better yet, there are no prepayment penalties or hidden fees.
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SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE
FOR MORE INFORMATION. Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including 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
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.