Can You Get a Student Loan With Bad Credit?

Can You Get a Student Loan With Bad Credit?
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Point Editorial

 For 20-somethings and late teenagers, a student loan can be a great way to start building your credit history and providing the necessary financial aid that allows you to attend college or university. 

Taking out a student loan is also an option for parents with poor or adverse credit history, as they can borrow on behalf of their college-bound kids.

Read on to learn more about how you can apply for student loans with bad credit, how it affects your credit score, and a list of the best loans available to you if you find yourself in this situation.

What is a student loan?

Unlike mortgages or vehicle loans, you can obtain a student loan with bad credit. Direct Unsubsidized and Subsidized Loans, the two student loans most frequently distributed by the federal government, do not require a credit check.

Private loans are also an option, as it is possible to apply for these as long as you have a creditworthy co-signer. Outlined below is the distinction between the two loan types. 

Federal student loans versus private student loans 

Federal student loans 

Researching government loans is a great place to start, and the good news is they come with the lowest interest rates and flexible repayment strategies.

Two classifications of federal loans exist: direct unsubsidized loans and direct subsidized loans. The former does not consider the applicant's financial need, so anyone can qualify for it. In comparison, only undergraduate students who the government deems to be in financial need can receive direct subsidized loans. While both loan types come with a fixed interest rate, the government pays for the interest on direct subsidized loans.

There are borrowing limits for both, and that amount is dependent on your year of study. 

For unsubsidized federal loans, first-year students can borrow $5,500, and second-year students can borrow up to $6,500. From their third year on, students can borrow up to $7,500. Dependent students, or those who rely on their parents, can borrow more each year than independent students. 

For subsidized federal student loans, first-year students can borrow up to $3,500, and second-year students can borrow up to $4,500. From their third year on, students can borrow up to $5,500. 

The third category of federal student loans is called the PLUS Loan, which is for graduate students or parents of graduate students. Eligibility for this type of loan does not require an outstanding credit score. Besides your level of study, the primary qualification is that you cannot have had any major financial problems in the past, such as bankruptcy, repossession, or foreclosure.

The chart below compares each of the three loan types in further detail.

Federal loan type Interest (all fixed rates) Requirements
Direct subsidized 3.7% None
Direct unsubsidized 3.7%–5.3% None
PLUS 6.8% Have a better than an adverse credit history

Private student loans 

Unlike government loans, private lenders typically run credit checks and consider your income, other debts, and repayment history. 

Applying with a co-signer is something to consider in this instance if your score is not ideal. According to recent data, more than 90 percent of undergraduate students apply for private loans with a co-signer.  

Ascent, Ernest, College Ave, and Sallie Mae are four of the most popular private loans to consider. 

4 of the best student loans

The following table illustrates four of the best student loans to apply for if you have bad credit. Remember, according to FICO, the most popular credit scoring model, a good score is 670 or higher.

Loan Interest (fixed) Credit requirements Loan term Best for
Ascent 3.3%–12.9% Minimum score of 540. 5-20 years Obtaining a loan without a needing a co-signer
Earnest 3.0%–12.8% 650 5-20 years Flexible repayment schedule, also considers unconventional factors like savings and career
College Ave 3.0%–13.0% 660 5-15 years Can borrow up to 100% of the cost of attendance
Sallie Mae 3.5%–12.6% 660 10-15 years Those who require a co-signer.

4 tips for improving your credit before applying for student loans

Tip 1: Review your credit report. This is arguably the first thing you should do if you want to improve your credit score. If you don’t know where you stand financially, you cannot take steps to fix it. 

You’re entitled to a free copy of your entire credit report annually from any of the three major credit bureaus, Experian, Equifax, and TransUnion.  

Tip 2: Pay off your debts. Settling any other outstanding debts will boost your score and demonstrate that you are trustworthy and capable of paying off future loans. Banks and other lenders will therefore be more willing to approve you.

Tip 3: Make payments on time. Paying bills on time accounts for 35 percent of your credit score and therefore has the most significant impact on it. Not only are late or missed payments detrimental to your score, but if this behavior persists, you will incur more interest, which can be challenging to pay off. 

Tip 4: Don't max out your credit limit. Experts recommend using no more than 30 percent of your allowed credit. It's always wise to leave breathing room in your credit should an unforeseen situation arise and you need to borrow more money. As is the case with credit cards, it can be easy and tempting to overspend since you are borrowing money from the credit company. But don't forget, you eventually have to repay everything you purchase. Exceeding your credit limit will harm your score, and you will most likely face extra fees.

The bottom line 

Student loans – particularly federal loans – are among the best options for young adults heading off to college. The same goes for parents of students with bad credit, too. Government loans require no credit check, which is a major plus. And, if federal loans are not enough, private loans are a good plan B.

Improving your credit score isn’t always easy, but that doesn't mean it isn't worth trying to improve. However, if you do not have the means or opportunity to do so currently, you can still achieve your financial goals regardless of your credit. It may just take a little more time, and that's perfectly fine, too. 

One tool to keep in mind, regardless of how far along you are in achieving those goals, is Point Card

Designed as an alternative tool to a traditional credit or debit card, Point promotes monetary independence. It allows cardholders to use their own earnings while receiving exclusive benefits, including unlimited cash-back on all purchases and bonus cash-back on subscriptions, food delivery, rideshare services, and coffee shops.

Card users are also eligible for fraud protection with zero liability, no interest rates, and car rental and phone insurance. So, in addition to earning cash-back, you'll also be able to save money as you won't need to worry about extra fees. By having a tool like Point Card that's constantly working hard for you, you'll be able to navigate the financial realm with ease. And that gives you time to focus your energy on both academic and non-academic endeavors instead.

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