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Student loans are necessary for many college students. In 2020, the total number of student loan accounts grew to 165 million, and the average individual balance reached a record high of $38,792, according to Experian data.
But what happens if your application gets rejected? It is possible to be denied student loans, though the potential reasons depend on whether you're applying for federal or private loans. Here's what you need to know and how you can respond.
Who Qualifies for Federal Student Loans?
Most federal student loans don't require a credit check. As a result, it's easier for most people to qualify for federal student loans over private loans. It's especially a good idea if you're an undergraduate student with no credit history or a graduate student or parent with a less-than-stellar credit score.
However, there are some things that can prevent you from getting federal loans.
Financial Aid Eligibility
To qualify for financial aid, which includes federal student loans, you must meet certain requirements, including:
- Demonstrate financial need.
- Be a U.S. citizen or eligible noncitizen.
- Have a valid Social Security number (with a few exceptions).
- If you're male, be registered with Selective Service.
- Be enrolled or accepted for enrollment as a regular student in an eligible degree or certificate program.
- Be enrolled in at least half-time study.
- Maintain satisfactory academic progress.
- Fill out the Free Application for Federal Student Aid (FAFSA) each year.
- Remain below your borrowing limit as determined by your school and the type of loan you're applying for.
Additionally, you can't be in default on any other federal student loan, you cannot owe money on a federal grant and you must agree to use your loan funds only for educational purposes. You may lose your eligibility if you're incarcerated or you've been convicted of a drug offense.
If you no longer qualify based on one of these requirements, you won't be able to get federal student loans until you address the reason.
Adverse Credit History
Direct PLUS Loans, available to graduate and professional students and parents, are the only type of federal student loan that requires a credit check. When being considered for a Direct PLUS Loan, the borrower's credit history will be reviewed, but not their credit score. Once the loan is issued, repayment begins immediately and payment history is reported to the credit bureaus under the borrower's name.
While there's no minimum credit score requirement, the Department of Education may deny your application if it finds significant negative items in your credit history.
Can You Get a Private Student Loan With Bad Credit?
If you don't qualify for federal financial aid or you've already maxed out your federal loan allotment and still fall short of your educational expenses, you may choose to apply for a private student loan to bridge the gap.
Unlike most federal loans, private loans typically require a credit check, and it's generally difficult to get approved unless your credit is in good standing. That doesn't mean you can't get approved with a bad credit history or no credit at all, but you'll likely need a creditworthy cosigner to boost your approval odds.
Even if you do qualify for a private student loan on your own without good credit, you may end up with a high interest rate without a cosigner who has a more established credit history.
What to Do if You Are Denied for a Student Loan
Depending on the type of student loan you applied for, here are some steps you can take to move forward.
Federal Student Loans
In many cases, the reason you've lost access to financial aid is clear. Depending on your situation, here's how you might be able to regain your eligibility:
- If you've defaulted on another federal student loan, get out of default.
- Appeal your school's decision.
- Become a citizen or resident, or reinstate your status as an eligible noncitizen.
- Repay past federal aid you received above and beyond what you needed.
- Complete an approved drug rehabilitation program or pass two announced drug tests by an approved program.
- Wait until you're no longer incarcerated.
Other circumstances may require other steps to regain your eligibility. Speak with your school's financial aid office to get the details you need.
Private Student Loans
If you've been denied a private student loan because of bad credit, here are some steps you can take to improve your chances next time you apply:
- Understand why your loan was denied.
- Improve your credit before applying again.
- Find a cosigner who has a good credit history.
It's also a good idea to practice good credit habits in the meantime. This includes paying all your bills on time, keeping your credit card balances low and avoiding new credit applications unless you absolutely need it.
Alternatives for When You Don't Qualify for Student Loans
While student loans can provide much-needed funds to help pay for your college education, they're only one piece of the payment puzzle.
If you're in a situation where you don't qualify for student loans but still need to continue your education, you may be able to work a part- or full-time job during the school year and during the summer.
You can also apply for any scholarships and grants through your school and other organizations. Explore resources posted by your university, college and even concentration office. Websites like Scholarships.com and Fastweb can be a useful resource as well to find scholarships available based on things like grades, ability, ethnicity and other criteria.
Finally, look for ways to reduce your expenses, such as moving back home or picking a more affordable school—for example, you may choose to attend a community college for a year or two, then transfer back to a university once you're able to qualify for student loans again.
A Good Credit Score Is Great for More Than Just Student Loans
Even if you're applying for federal student loans that don't require a credit check, look for opportunities to build your credit history for the future. For example, you may consider getting a student credit card, using it and paying off the balance on time and in full every month to build a positive history. Student loans are a type of installment loan, and making on-time payments can help you build your credit history just like other forms of credit. Be sure to start making payments as soon as you're required to and reach out to your loan servicer if you expect you'll have difficulty making payments; you may be offered accommodations.
Throughout this process, it's important to monitor your credit regularly. This practice will help you understand how your actions impact your credit score, and you'll also be able to spot potential errors and even fraud before it damages your credit history.
As you take steps to build your credit, you'll put yourself in a better position to qualify for affordable financing, lower insurance rates and more.