Finding a way to get approved for student loans with bad credit is about as difficult as finding water in a desert. How do college students have bad credit, since most students have never used credit cards or taken out loans?
The new credit paradigm has changed, as many high school students apply for credit cards and subsequently have charges that they cannot afford. Add to that a growing number of older students that work full time jobs and the student loans with bad credit pool significantly expands.
Federal Student Loans Are a Good Option
Since college students have difficulty finding privately financed student loans, the best option for taking out student loan with bad credit lies with the US Government.
The federal government does not check histories of student loan applicants. The ease of receiving approval for federally funded student loans has prompted a rapid increase in student loan applications.
College Students have access to both subsidized and unsubsidized Stafford student loan to help defray or eliminate tuition expenses. Stafford loans operate n a financial need basis, with different loans matching unique college student financing needs. Loans such as Stafford and Perkins offer college student an affordable way to pay off tuition debt. Finite federal government resources means many applicants receive little or no help, since they fall beyond the income restrictions mandated by the federal government.
Federal student loan with bad credit options:
- Stafford
- Perkins
- GradPLUS
- ParentPLUS
Complete the FAFSA form online to apply for the federal student loans with bad credit. A FAFSA form gathers student financial data and the form has become mandatory for applying for financial aid through most four-year colleges and universities. Students do not have to pay an application fee, as they do for private loans. By completing a FAFSA, college students choose among different loans, grants, and scholarships, even student loans with bad credit.
Are Private Student Loans a Pipe Dream?
In 2014, more than 14% of all student loan borrowers defaulted on student loans. This is an amazing number, because of the dire consequences that derive from walking away from student loan payments.
The high student loan default rate and financial instruments that provide better returns represent the primary reasons why private lenders eschew approving student loans, especially student loans with bad credit. Yet, student loans with bad credit have not completely dried up and students have ways to bolster their student loan applications.
A Cosigner Improves the Chances of Approval for student loans with bad credit
Just as with thin credit for people that have not established a credit history, a cosigner can turn the student loan for bad credit application into an approved student loan application. Alternatively, there are some student loan providers that offer student loans without a cosigner.
A student borrower must recruit a cosigner that has established a strong credit history. Family members that possess strong credit histories are often the best place to start for recruiting a cosigner. Enlisting the help of a family member cosigner holds the student loan borrower accountable for adhering to the repayment schedule. Private lenders typically prefer a cosigner for college students that cannot demonstrate credit histories. Some private lenders target college student loans, even student loans withr bad credit. You can expect to pay exorbitant interest rates, which often comprise the reason for student loan defaults.
An Overview of Credit Scores
Lenders use credit scores to determine the credit worthiness of loan and credit card applicants. Low credit scores act as the proverbial red flag and pretty much end the student loans with bad credit hunt. Any lender that offers student loans with bad credit typically adds cost prohibitive fees and charges, as well as bumps interest rates to unaffordable levels. Credit score range from 300 to 850, depending on the three primary credit score agencies. Lenders vary on the definition of student loans with bad credit, but the following credit score breakdown provides students and parents with a general idea on what constitutes bad credit.
- 700-850: Excellent
- 680-699: Good
- 620-679: Average
- 580-619: Low
- 500-579: Poor
- 350-499: Bad
Remember that many lenders do not offer loans to anyone applicant that possesses a credit score below 620. The designation of a bad credit rating does not last forever. By law, credit reporting agencies must remove negative citations after seven years have passed since the negative credit incident, such as late credit car payments. Diligence and discipline play important roles in determining how long credit risks remain in the bad credit category.
How Bad Credit Happens
Acquiring a credit score under 619 requires several factors to occur. Equifax, Experian, and TransUnion consider longevity and credit diversity, before the institutions issue credit scores for consumers. The longevity and diversity criteria used to calculate credit scores go against most college students. How many 18-year old freshmen do you know that have established credit histories of more than two years and possess a diverse portfolio of credit sources? Credit diversity includes revolving credit such as Visa, installment credit that covers long-term loans, and open credit that requires full payment each month. College students rarely have recorded one, much less all three types of credit.
Consolidation and Deferment
Lenders started consolidation programs to help college students manage multiple loan payments every month. The student loan management strategy has nothing to do with student loans with bad credit, as it does not influence credit scores. Yet, consolidation enhances the financial status of college students that fall behind paying several student loans. Some lenders consolidate student loans under a lower interest for students that have demonstrated the capability of making timely student loan payments.
Deferment helps students that cannot pay off student loans. The policy typically comes into play during economic downturns, such as the housing collapse that unfolded towards the end of 2008. Students that receive deferments delay student loan payments for a time specified by the lending institution. The problem with deferment is student loans with bad credit still accumulate interest that makes student loans much more costly to settle.
The Impact of High Interest Rates on Student Loans with Bad Credit
Some finance experts believe that bad credit has an upside for college students seeking loans to cover tuition. The reasoning for the optimism stems from the high interest rates charged by lenders to cover for the risks of issuing student loans with bad credit applicants. Lenders view student loans in the same light as they view commercial and personal loans: the higher the risk, the higher the interest charged on the loan. Higher interest rates generate enough revenue to offset the losses caused by loan defaults.
The Bottom Line on Student Loans with Bad Credit
Students that possess credit scores that fall below 619 can expect difficulty in securing student loans with bad credit. The federal government provides an outlet for bad credit student loans, with need-based student qualifying for college financing. Most private lenders prefer to reap the profits from personal and commercial loans, instead of exposing their balance sheets to risky student loans with bad credit. Both the federal government and some private lenders package student loans with bad credit. However, lenders that approve student loans with bad credit charge much higher interest rates that make the loans cost prohibitive for college students.
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Watch video How to Get Student Loans for People With Bad Credit
If a student has bad credit, they still have options, including Stafford loans that do not require credit history checks. Try to get an unsecured loan from a private institution with help from a financial aid officer in this free video on student loans.
