How to Qualify for Student Loans With Bad Credit

Your credit score is like a grade — one that tells lenders how likely you are to pay back money you've borrowed. The higher your credit score, the more willing lenders are to work with you.

If you have a college-age child, you’ll need to factor in their credit score as well as your own when considering student loans. If you or your child need to take out student loans but have bad credit, what are your borrowing options?

Here are some tips on how to qualify for student loans — even with less than great credit:

What is "bad" credit?

The scoring model that's used by 90% of major lenders is FICO^®. Scores range from 300 to 850 and consider five main factors:

According to credit bureau Experian^®, a score that falls between 580 and 669 ranks as “fair," while a score of 300 to 579 ranks as “very poor." If your or your child's credit score falls within these ranges, you may face difficulties getting approved for a loan, and/or could pay higher interest rates when borrowing money.

Getting federal student loans with bad credit

Even if you or your child has bad credit, you still have plenty of loan options. That's especially true with federal student loans, which don't have the same credit requirements as other types of loans.

Federal student loans have the backing of the government — they don't require a typical credit check because they're considered financial aid. When you fill out the Free Application for Federal Student Aid (FAFSA^®) each year, you'll find out if you qualify for federal student loans, and if so, how much and what type.

Each year, the federal government also sets student loan interest rates, which are the same for all borrowers regardless of individual credit scores. However, that doesn't necessarily mean the borrower's credit doesn't matter. Depending on the type of loan, your credit report could still be a deciding factor in whether you receive approval.

Direct loans made to undergraduate students, as well as unsubsidized and subsidized federal Direct Loans, do not require a credit check. As long as the student qualifies for these loans under the FAFSA, they can borrow even with bad credit.

Federal Direct PLUS loans require credit a check

Federal Direct PLUS loans are available to graduate/professional students and parents. These loans require that the borrower undergo a credit check for an “adverse credit history." In other words, your actual credit score doesn't matter, but the government will want to know if you've had a history of missed payments, bankruptcy, foreclosure, or other major negative marks on your credit.

If it turns out you have an adverse credit history — and you don't qualify for a federal Direct PLUS loan — you're not necessarily out of luck. If you can show that your credit problems are due to extenuating circumstances, you can appeal to have your loan approved. Alternatively, you can apply with an endorser who has good credit, which is similar to having a cosigner. (Like cosigners, endorsers are responsible for paying back the debt if you can't.)

Private student loan options

Unlike federal student loans, private student loans are made through independent financial institutions, such as banks and credit unions. The loan terms, interest rates, and qualification criteria vary depending on the lender. Often, borrowers supplement any college education expenses that aren't covered by financial aid and federal loans with private student loans.

Like other types of loans, private student loans are subject to a credit check, with your score impacting approval, rates, and terms. Usually, lenders reserve the lowest interest rates for borrowers with an excellent credit report, and may not approve those with poor credit. Many lenders allow you to apply with a cosigner, but again, this person is equally responsible for the debt, so it's important to take this route only if you're sure you can repay the loan on time.

In addition to your credit score, student loan lenders may also consider your employment history, income, and other financial factors. So a good credit score isn't necessarily a guarantee that you'll be approved for a private loan, but it certainly helps.

Refinancing student loans with bad credit

If you have existing school loans and want to get a lower interest rate or change the terms, you might want to consider refinancing. Student loan consolidation and refinancing are often confused, but the distinction is an important one.

Student loan consolidation is available only for federal student loans through a federal Direct Consolidation Loan. Often, consolidation is required to enroll in certain repayment plans and forgiveness programs. In this case, your credit score isn't a factor — the interest rate on your consolidation loan will be a weighted average of your existing loans, plus a small percentage.

The process of refinancing, on the other hand, is only available through private lenders. This is the case even if you're refinancing federal student loans. That's because the refinancing process involves taking out a new loan through a private lender and using the funds to pay off your old loans. It also means your credit score is a factor in whether you receive approval. You'll be subject to the same types of requirements as when applying for private student loans.

Ready to pay for college

Student loans can be confusing, but we're here to help you make sense of it all. For more information on student lending, check out our student loan options or call 1-888-411-0266 to speak to a Student Lending Specialist.