Having a good credit history is vital in so many areas of life, from obtaining credit and mortgages, to loans, employment and insurance. Whilst having bad credit can leave you dealing with sub prime lenders the federal government does not discriminate against a student’s right to an education, and offers federal student loans which are not subject to credit checks. The only proviso is that students must not be in default on another student loan.
Application for federal student loans is made by completing and submitting the standard FAFSA, which will also determine your eligibility for a federal Pell grant. There are a number of loans available, none of which take your credit score into consideration, including the federal Perkins loan, the Stafford subsidized loan, and the Stafford unsubsidized loan. However they do take family income into consideration and if the amount of borrowing obtained through federal student loans is insufficient to cover the costs of a college education, then students often need to turn to private lenders.
All student loans issued by private lenders are subject to credit checks, and having bad credit will work against you. A private lender will not issue a loan to a student with bad credit unless a responsible third party is willing to co-sign the loan, and stand as guarantor. The co-signer will of course need to have good credit. However if a loan is approved in such circumstances the student will be unlikely to obtain a low interest rate on the loan and will be subject to a higher rate.
Students with bad credit are asking a lot of a co-signer, as they become equally liable for missed payments on any loan granted. Some lenders are assessing co-signers on the value of their homes as well as on their credit scores, and using manual underwriting methods to lessen their own exposure to risk and the possibility of future defaults. Without a willing co-signer it is improbable that a student with a bad credit history would be eligible for a private student loan.
It is possible that parents may be willing to take on a federal Plus loan in their own names, which are available at a lower interest rate than private student loans. Plus loans are also subject to credit checks, but on the parent as opposed to the student, and the credit scoring criteria is not as high as that required by private lenders. However Plus loans remain in the parents name and are not transferable to the student, whereas a co-signer guaranteeing a private student loan will generally be released from their obligations after 3 to 4 years of timely payments.
A student with bad credit would be well advised to seek out as much funding as they can from grants and scholarships, and then make full use of federal student loans and the federal work study program to earn additional funds. If there is a funding shortfall and private loans are necessitated, but there is no willing co-signer, the best option would be to delay college entrance.
It is a viable option to work to rebuild a good credit history in order to obtain the necessary loans but at lower interest rates, or to seek employment which would provide enough funds to pursue a college education without the need for private student loans.