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Eager to pursue a higher education, but worried your bad credit will stand in the way? Fear not: Bad credit doesn't automatically disqualify you from getting a student loan. In fact, the most borrower-friendly student loans—those issued by the federal government—don't assess your credit at all in most cases. If you have bad credit and are applying for student loans, here's what you need to know.
Why Federal Student Loans Are Best for Bad Credit
Federal student loans should be your first stop when borrowing money for college. Not only do they generally have lower interest rates than private student loans, but they also come with a range of protections, such as income-based repayment, loan forgiveness and forbearance or deferment options.
If you have limited or bad credit, federal student loans are undoubtedly your best option, because most do not require a credit check (the one exception is parent PLUS loans) or a cosigner. While you must meet the eligibility requirements and fill out a Free Application for Federal Student Aid (FAFSA), your credit scores won't have any impact on the amount of financial support you receive.
Another reason federal student loans are best for bad credit? They carry a flat interest rate that applies to all borrowers, regardless of credit scores. So borrowers with bad credit get the same interest rate as those with excellent credit. That's not the case with most other types of loans, including private student loans.
Can You Get a Private Student Loan With Bad Credit?
While federal student loans are preferable to the alternatives, they may not be an option for every borrower. Perhaps you don't qualify, need more financial support than federal loans can offer or have already maxed out your federal loan limit. In that case, you may need to look into private student loans.
The thing is, most lenders that issue private student loans will assess your creditworthiness. So, if you have low credit scores, you might only be approved for loans with high interest rates, or your application may be denied altogether.
To get a loan with bad credit, you'll need to be strategic. Check your credit reports and scores to understand your credit situation before you begin to explore your borrowing options. You can get a free copy of your credit report from all three consumer credit bureaus through AnnualCreditReport.com. You can see credit scores based on your Experian credit file for free through Experian.
Once you start your search, seek out lenders that fit your needs rather than applying for every private student loan you can find, as that could slightly damage your scores (temporarily, at least). One helpful tool is Experian CreditMatch™, which allows you to quickly compare student loan issuers based on their interest rates and credit score requirements.
If you're not having any luck—either because you have bad credit or no credit history—you can also consider getting a cosigner. Typically, this is a creditworthy parent or other relative who is willing to share responsibility for the loan.
Alternatively, you can explore options from lenders that evaluate your future earning potential instead of, or in addition to, your credit. Funding U and Ascent, for example, look at factors such as your school, major and academic performance.
Private student loans can help you get the funding you need for college, but consider them only once you've exhausted all other options, including subsidized and unsubsidized federal student loans, scholarships, grants and assistance from your state.
How to Improve Your Credit Before Applying for a Private Student Loan
If you do ultimately decide to take out a private student loan, improving your credit scores can help you qualify for lower interest rates and save you a lot of money in the long run. On a $25,000 student loan at a 9% interest rate, for instance, you'd pay $13,000 in interest over 10 years. With a 6% interest rate on a loan of the same amount, you'd pay nearly $5,000 less in interest by the time the loan is paid off.
Thus, before applying for a private student loan, it's wise to try and increase your credit scores. Here are some strategies for improving bad credit or building credit from the ground up:
- Pay off debt—and pay on time. If you already have credit card debt, pay off as much as possible before applying for a private student loan. Reducing your credit utilization can give your credit scores a quick boost. And, going forward, always pay your bills on time, as that is crucial to building strong credit scores.
- Open a credit card. If you have zero credit history, responsible use of a credit card can show lenders you're able to responsibly manage debt. Or, if you've missed payments in the past, a secured card can help you get back on track. Just make sure to pay off your balance every month to keep your utilization low.
- Become an authorized user. Whether you're building or rebuilding credit, becoming an authorized user on a credit card that belongs to a loved one who always pays their bill on time could help raise your scores.
- Sign up for Experian Boost®ø. No credit history? No problem. This unique service allows you to build credit by adding on-time payments of utility, internet, cellphone and Netflix® bills to your credit report.
- Talk to your landlord. Since Experian includes positive rental payments on its credit reports, make sure your landlord is reporting payments to Experian RentBureau.
The Most Important Thing to Remember About Student Loans
Whether you decide to use federal student loans, private student loans or a combination of the two, there's one thing you should always remember: Student loans must be paid back. So, even if graduation seems like forever from now, think carefully before signing on the dotted line.
To put it in perspective, the average student loan debt was $35,620 in 2019, according to Experian data. If you borrowed that much at the federal student loan interest rate of 2.75%, you'd be on the hook for payments of $340 per month for a whole decade after finishing college.
If you borrowed that same amount at a 14% interest rate—which is feasible if you have bad credit and use private student loans—you'd owe a whopping $553 per month post-graduation. In some cities, that could nearly cover your rent! Not to mention, you'd pay a total of $30,747 in interest over 10 years.
It's possible to get student loans with bad credit, and a college education is valuable, but it's vital to first crunch the numbers before taking on debt. You're not required to accept the full loan amount you're offered—and if you take only what you need, we promise your future self will love you for it.