Having bad credit or no credit history can hamper many financial decisions such as renting an apartment or getting a car loan. But it won’t prevent you from getting a student loan.
The federal government’s student loan program is designed to help all students cover college costs, and bad-credit borrowers can also get private student loans if they have a co-signer with good credit. Making regular payments on your student loans will help you establish a positive credit history so you can get approved to rent an apartment or buy a car later.
Here’s a look at two student loan options, plus some pitfalls that borrowers with tarnished or unestablished credit histories should avoid.
Federal student loans an option for bad-credit borrowers
Federal student loans for undergraduates don’t require a credit check. The application for federal student loans, which include subsidized or unsubsidized direct loans, also known as Stafford loans, and Perkins loans, is the Free Application for Federal Student Aid. Also known as the FAFSA, this form must be submitted if you also want to be considered for need-based aid including grants, work-study and some scholarships.
Grad and Parent PLUS loans do require a credit check, but the government isn’t necessarily looking for good credit — it just wants to see that you don’t have any negative marks, such as a past bankruptcy or charged-off loans.
NerdWallet recommends exhausting all your federal student loan options before considering private student loans. Federal student loans offer better borrower protections compared with private loans, including the ability to switch to an income-driven plan, get loan forgiveness, or defer your loans if you lose your job or get sick.
Undergraduates can borrow up to $57,500 total in federal direct loans and up to $27,500 in Perkins loans throughout their undergraduate careers, depending on their financial need and whether they’re independent or dependent students. Graduate students can borrow up to $138,500 in federal direct unsubsidized loans and up to $60,000 in Perkins loans, however the amount they borrowed as undergrads will be subtracted from the amount they’re eligible for as graduate students.
» MORE: Federal vs. private student loans
Private student loans with a co-signer
If you’re an undergraduate student, you may have a low credit score simply because you don’t have a credit history. But if you’ve borrowed the maximum of federal student loans that you’re allowed, and you still need extra money to cover college costs, you may be able to get a private student loan if you have a co-signer with good credit.
A variety of private lenders offer student loans, including large banks such as Wells Fargo, Sallie Mae, Discover and Citizens Bank, and new, online lenders such as SoFi, Earnest and CommonBond. Before choosing a lender, compare your options to look for the best interest rate, and the most favorable terms and borrower protections.
Some private lenders will let you release your co-signer after you make on-time payments for a certain period. This option can be appealing if you know someone who’s willing to be your co-signer but doesn’t want to be on the hook for your loan forever.
» MORE: How to get a student loan without a co-signer
A word of caution
Avoid using personal loans or credit cards to pay for your college costs. You could end up paying higher interest rates, and those products aren’t likely to offer the same features that even most private student loans do, such as the opportunity to defer your loans if you go back to school.
Finally, borrow only what you need to cover college costs. If you’re struggling financially, it may be tempting to take on more debt to use for your other needs, but it’s best to minimize the amount of debt you’ll have to pay back later.
» MORE: 4 ways to spot a student loan scam
Next steps
Start working on boosting your credit now so that you’ll have a good score when it comes time to rent an apartment or buy a car. Good credit gives you access to lower interest rates and a wider choice of loan products. Check out NerdWallet’s guide to building credit to learn more.
Teddy Nykiel is a staff writer at NerdWallet, a personal finance website. Email: teddy@nerdwallet.com. Twitter: @teddynykiel.
Image via iStock.
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