Get a Student Loan With Bad Credit

Most students can’t afford to go to college without loans. The expenses associated with higher education are stressful for everyone, but if you have bad credit, you may be especially worried. Fortunately, you can take advantage of federal financial aid regardless of your credit history. Private student loans may be trickier to get, but you definitely have some options.

Steps

Maximizing Your Federal Financial Aid

  1. Apply for student aid. You can qualify for financial aid regardless of your credit score, and you can still get student loans from the federal government. Most federal financial aid is based on need alone; your credit is not taken into consideration. However, a bad credit history due to bankruptcy, default, foreclosure, etc., may affect you, especially on Parent and Graduate PLUS loans, but it doesn't automatically disqualify you. If you have bad credit, you should make the most of your federal financial aid opportunities before you move on to private funding, which can be much more difficult to secure.
  2. Learn the basic eligibility requirements. To get federal financial aid, you need to be a U.S. citizen, a U.S. national, or a U.S. permanent resident. Your school of choice must be an accredited one, and you must be attending at least half time.
    • There are exceptions to the citizenship requirements, so check with the financial aid offices at any schools you are considering. Documented refugees and victims of human trafficking, for example, may qualify for financial aid.[1]
  3. Take advantage of your independent status if possible. Depending on your circumstances, you may qualify for more federal financial aid if you are considered an independent student. If you will be at least 24 years old by the end of the year, you can fill out your financial aid paperwork as an independent student. This means that your parents’ income will not be considered, and you may get more aid.[2]
    • In certain cases, students under the age of 24 can qualify as independent. Talk to your financial aid office if you are an orphan, a former foster child, a ward of the court, homeless, a veteran, in graduate school or professional school, or married or have children.

Applying for Financial Aid

  1. Submit your Free Application for Federal Student Aid (FAFSA) form early. The FAFSA is the only way to apply for federal financial aid. Fill out the FAFSA online at www.fafsa.gov, or, if you know what school you will attend, request a form from the financial aid office. If you are trying to maximize your aid it’s to your benefit to submit the FAFSA. You should submit the form as early as possible, ideally during the January before your first fall term. This is because some loans are given on a first-come, first-served basis.[3]
    • The FAFSA asks about your tax information, including your social security number, your number of dependents, and your annual income. If you are not an independent adult over age 24, you will also have to provide your family’s tax information. However, do not make the mistake of waiting until you’ve filed your taxes to submit the FAFSA – you can submit the form using estimates.
    • Similarly, you don’t have to wait until you know which school you’ll be attending or how much it will cost. Get the form submitted as early as possible.
  2. Receive your Expected Family Contribution (EFC). Once you’ve submitted your FAFSA, you will receive a confirmation and an estimated EFC. The federal government determines your EFC with a formula, using the information from your FAFSA. This number represents the amount of money that the government expects you and your family to contribute to your education each year. The lower the EFC, the more financial aid you are likely to receive.[4]
    • Many students find that the EFC is higher than what they can actually afford to pay. If this is the case, don’t give up. You are also eligible for non-need-based federal aid, such as unsubsidized loans. By cutting costs and investigating other sources of support, you may still be able to attend your school of choice.
  3. Determine what attending your program will cost. Whether you’ve decided on a program or are debating the merits of multiple programs, you’ll need to determine what your annual expenses will actually be. Check with the school or schools for an estimated cost of attendance.
    • This cost should include not only tuition and fees but also room and board (unless you will live with parents or relatives for free), groceries and/or meal plan costs, textbooks, supplies, laboratory fees, transportation costs, day-care costs if you have young children, and miscellaneous personal expenses.
  4. Compare your cost of attendance with your EFC. In most cases, once you add up all your costs, you will have a number much higher than your EFC. You can get a rough estimate of what your federal financial aid will be by subtracting your EFC from the cost of attendance.[4]
    • As an example, consider a university with an annual cost of attendance of $27,000. If you have an EFC of $10,000, you would subtract that from the cost and see that you are likely to be offered $17,000 a year in financial aid. A significant portion of that amount will be in the form of student loans. If you cannot afford the $10,000 EFC, you can obtain unsubsidized loans to cover this amount.
  5. Read the fine print. When your official financial aid offers arrive, read them carefully. Your financial aid package will typically consist of:
    • Grants. Grants are funded by the government and do not need to be paid back.
    • Loans. There are various types of loans, some subsidized and some unsubsidized, but all of them will eventually need to be paid back. It is extremely difficult to discharge student loans, even in bankruptcy.
    • Work-study offers. If you are awarded work study, you’ll spend a predetermined number of hours working somewhere on campus to earn that extra funding.

Choosing Financial Aid Offers

  1. Familiarize yourself with your loans. Accepting a student loan is a major responsibility: you are agreeing to use the money for your education and begin paying it back as soon as you graduate. If your credit is bad, having this additional debt may place a considerable financial burden on you, possibly for decades to come. Take the time to distinguish between the different types of loans and understand how they work.
    • Direct Subsidized Stafford Loans are awarded based on financial need. These are the least risky, especially for someone with bad credit. The government will pay the interest on subsidized loans while you are in school, and for six months following your graduation. From that point on, you will be responsible for making payments, and interest will accumulate.[5]
    • Direct Unsubsidized Stafford Loans can be awarded through your school regardless of your financial need. These will make a bigger impact on your overall debt because, unlike Direct Subsidized Loans, you will be responsible for all of the interest and payments.[5]
    • Federal Perkins Loans are an additional form of funding earmarked for students with the most need. They have a low interest rate of 5% and do not need to be repaid until after you graduate.[6]
  2. Request additional funding for education-related expenses. Depending on your school, you may be able to petition your financial aid office to adjust your offer. Pertinent expenses might include: costs associated with child care, if you have children, costs associated with a disability, or medical costs not covered by insurance.
  3. Discuss other options with your parents. If your funding is still inadequate, and you have supportive parents who are willing to help, consider having them apply for a federal PLUS (Parent Loan for Undergraduate Student). These loans have the downside that interest rates are higher than other student loans but they are still much cheaper than a private loan from a bank.
    • Note that these Parent loans cannot be used for graduate or professional school. There is a separate graduate/professional school PLUS loan that the student applies for.
    • Parent loans are also very difficult to discharge, even with bankruptcy, so only consider this option once you have exhausted other financial aid sources.

Applying for Private Funding

  1. Consider your other options first. Federal financial aid is almost always a better option than private lending, and this is especially true if you have a bad credit. The government does not consider your credit score for most forms of aid; rather, they award you grants and loans based on need alone. They do look at your credit history, but are much more forgiving than a private lender. If you have already borrowed as much as you can from the federal government, and you cannot cut your costs, you may have to look into private funding.
    • Some programs, such as study abroad, may need to be paid for partially through private loans if they cost significantly more than a semester's tuition at your college.
  2. Make sure you meet the basic eligibility requirements. Although requirements may vary from lender to lender, most institutions require you to be a U.S. citizen, a U.S. national, or a U.S. permanent resident. Additionally, you typically need to attend an accredited institution at least half time; lenders won’t usually loan you money to take only a course or two each term.
  3. Request credit reports from the three major credit reporting agencies. Under federal law, you are entitled to request one free credit report every year from each of the three main agencies: Equifax, Experian, and TransUnion. Rather than contacting these agencies directly, you’ll need to go to annualcreditreport.com and submit the Annual Credit Report Request Form.[7]
    • If you want to review your credit reports from these agencies more than once per year, you’ll have to go to each individual agency’s website and purchase the extra reports.
  4. Review your credit reports. As long as you submitted the Annual Credit Report Request Form online, you’ll be able to view your reports right away (you may have to wait up to 15 days if you ordered by mail or phone). Read your reports carefully; if you notice any errors, you can dispute them by contacting the appropriate agency or even better, the store or bank you originally did business with.[7]
  5. Check your credit score. The free credit reports you get from annualcreditreport.com do not include your credit score, but it's important that you have this information before applying for a private loan. If you want to obtain your credit score, your bank may offer this service or for other sources visit Check Your Credit Score.
    • Credit scores range from 300 to 850. In general, a credit score over 750 is excellent and will qualify you for loans and lines of credit with the best terms. If your score is under 620, you are considered a high-risk borrower, and you may have trouble securing private student loans without help.
    • If your score is lower than you expected it to be, check your credit reports. Sometimes errors are made that unfairly impact your credit score. You can contact the credit bureaus to resolve these errors.
  6. Plan to borrow as little as possible. Private loans are, in the long term, more expensive than federal financial aid, and you’ll have fewer options for deferring or consolidating your payments after you graduate. You don’t want to risk further damage to your credit by borrowing money you will never be able to pay back. Resist the urge to apply for more than you need.
  7. Research your options. There are a variety of private student loans available from banks, credit unions, and other lenders, but you don’t want to start applying without doing some research. Consider using websites like Student Loan Analytics to compare products, and beware of advertisements telling you that you can qualify for lots of money regardless of your credit – these tend to be scams or, at best, loans with terrible interest rates.[8]
    • As you shop around, pay particular attention to interest rates, repayment terms, credit requirements, the amount of money you can borrow, and regulations concerning how the money can be used.
  8. Get a cosigner. If your credit is less than stellar, it will be very difficult to get a private student loan in your own name – and almost impossible to get one with decent terms and a moderate interest rate. Therefore, consider finding someone with better credit (a parent, perhaps, or another relative) to cosign the loan with you.
    • Make sure that your cosigner is fully aware of his or her obligations. Cosigning involves a very high level of responsibility. If you don’t make your payments after graduation, the cosigner could wind up having to pay or damage his or her credit.
    • Private student loans are almost never discharged by bankruptcy. Borrowing more than you need could mean your elderly parents are paying the loans well into their retirement. Exhaust all other sources of financial aid before borrowing private student loans, and then, borrow only what you truly need.
  9. Apply for your loan. Once you’ve found a lender who seems promising, apply for the loan. In most cases, you can fill out all the necessary paperwork online.
    • Be sure you are applying for a designated student loan, not simply a personal loan. In most cases, you can wait to make payments on a student loan until after you are finished with school. This isn’t the case with personal loans – you’ll have to make payments right away. If your budget won’t allow for that, stick to loans for students.
  10. Read the terms and conditions carefully. If you qualify for the loan, don’t accept it until you have read the fine print. Know what the interest rate is, when you’ll have to start making payments, and how the money can be used.

Tips

  • Compare financial aid offers from various schools. Don't hesitate to contact the school of your choice to tell them you received a higher offer from someone else, and ask if they will match it.
  • Make your credit score a priority. No matter what your budget, work to minimize your debt and pay your bills on time. Doing so will raise your credit score over time and make your life simpler when you graduate and have to deal with repayment.
  • Use federal funding first. The benefits of federal financial aid – including lower interest rates and no credit-related worries – make it far more helpful than private loans for most students. Apply for private funding only if you absolutely need to supplement your federal financial aid.
  • Know that you will have to pay back your loans whether you finish school or not. The only exception is if your school closes or cancels your program, leaving you unable to finish.

Warnings

  • Private students loans and personal loans are best taken in small amounts to pay for the difference between the money covered by the federal loan and the amount you need to cover the cost of tuition and expenses.
  • Beware of unscrupulous lenders who target borrowers with bad credit ratings. These lenders may offer low introductory rates that skyrocket after a grace period, or they may charge hidden fees or outrageous rates right from the start.
  • If you are taking a personal loan that requires immediate payments, do the math first to make sure that you can afford the monthly payments.

Related Articles

  • Report Bad Debt

Sources and Citations

  1. ↑ https://studentaid.ed.gov/eligibility/non-us-citizens
  2. ↑ http://www.fastweb.com/financial-aid/articles/699-federal-financial-aid-and-the-independent-student
  3. ↑ https://studentaid.ed.gov/fafsa
  4. ↑ 4.0 4.1 https://studentaid.ed.gov/fafsa/next-steps/how-calculated#whats-the-expected-family-contribution
  5. ↑ 5.0 5.1 https://studentaid.ed.gov/types/loans/subsidized-unsubsidized
  6. ↑ https://studentaid.ed.gov/types/loans/perkins
  7. ↑ 7.0 7.1 http://www.consumer.ftc.gov/articles/0155-free-credit-reports
  8. ↑ http://www.finaid.org/loans/loancomparisonsites.phtml
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