How to Get Approved for Student Loans with Bad Credit
- June 11, 2015
- Posted by: Dave Rathmanner
- Category: Student Loans
Updated: February 8th, 2018
Ask the parents of college students about tuition costs and you can expect a slow roll of the eyes. College costs have increased at a rate of 7% for several decades. Since 1982, family incomes have risen by nearly 120%. However, College tuition has outpaced inflation and family incomes by soaring 500%. College tuition that cost $10,000 in 1985 would exceed the inflation rate by two and half times.
It is no wonder the both parents and college students seek alternative ways to what has become a mandatory career investment. Student loans represent a large portion of the funding families receive to pay for a four-year degree, according to our college debt statistics.
But not all students and families are blessed with perfect credit. What about student loans for people with bad credit? At LendEDU, we get plenty of individuals looking for student loans with bad credit. You should know that there are student loan options available for people with bad credit.
What About Student Loans for Bad Credit?
Finding private student loans for bad credit is about as difficult as finding water in the
Federal Student Loans are an Option
Since college students have difficulty finding privately financed student loans, the best option for taking out student loan for bad credit lies with the United States Government.
The federal government does not check histories of student loan applicants. The ease of receiving approval for federally funded student loans has prompted a rapid increase in student loan applications.
College Students have access to both subsidized and unsubsidized
Here are the federal student loan options for bad credit applicants:
Complete the FAFSA form online to apply for the federal student loans for bad credit. A FAFSA form gathers student financial data and the form has become mandatory for applying for financial aid through most four-year colleges and universities. Students do not have to pay an application fee, as they do for private loans. By completing a FAFSA, college students choose among different loans, grants, and scholarships, even student loans for bad credit.
Are Private Student Loans a Pipe Dream?
In 2014, more than 14% of all student loan borrowers defaulted on student loans. This is an amazing number, because of the dire consequences that derive from walking away from student loan payments.
The high student loan default rate and financial instruments that provide better returns represent the primary reasons why private lenders eschew approving student loans, especially student loans for bad credit. Yet, student loans for bad credit have not completely dried up and students have ways to bolster their student loan applications.
A Cosigner Improves the Chances of Approval for Student Loans for Bad Credit
Just as with thin credit for people that have not established a credit history, a cosigner can turn the student loan for bad credit application into an approved student loan application. Alternatively, there are some student loan providers that offer student loans without a cosigner.
A student borrower must recruit a cosigner that has established a strong credit history. Family members that possess strong credit histories are often the best place to start for recruiting a cosigner. Enlisting the help of a family member cosigner holds the student loan borrower accountable for adhering to the repayment schedule. Private lenders typically prefer a cosigner for college students that cannot demonstrate credit histories. Some private lenders target college student loans, even student loans for bad credit. You can expect to pay exorbitant interest rates, which often comprise the reason for student loan defaults.
An Overview of Credit Scores
Lenders use credit scores to determine the credit worthiness of loan and credit card applicants. Low credit scores act as the proverbial red flag and pretty much end the student loans for bad credit hunt. Any lender that offers student loans for bad credit typically adds cost prohibitive fees and charges, as well as bumps interest rates to unaffordable levels. Credit score range from 300 to 850, depending on the three primary credit score agencies. Lenders vary on the definition of student loans for bad credit, but the following credit score breakdown provides students and parents with a general idea on what constitutes bad credit.
Remember that many lenders do not offer loans to anyone applicant that possesses a credit score below 620. The designation of a bad credit rating does not last forever. By law, credit reporting agencies must remove negative citations after seven years have passed since the negative credit incident, such as late credit car payments. Diligence and discipline play important roles in determining how long credit risks remain in the bad credit category.
How Bad Credit Happens
Acquiring a credit score under 619 requires several factors to occur. Equifax, Experian, and TransUnion consider longevity and credit diversity, before the institutions issue credit scores for consumers. The longevity and diversity criteria used to calculate credit scores go against most college students. How many 18-year old freshmen do you know that have established credit histories of more than two years and possess a diverse portfolio of credit sources? Credit diversity includes revolving credit such as Visa, installment credit that covers long-term loans, and open credit that requires full payment each month. College students rarely have recorded one, much less all three types of credit.
Consolidation and Deferment
Lenders started consolidation programs to help college students manage multiple loan payments every month. The student loan management strategy has nothing to do with student loans for bad credit, as it does not influence credit scores. Yet, consolidation could help college students before there's a risk of falling behind on student loan payments. Aside from combining loans together, private companies can consolidate student loans under a lower interest rate for students that have demonstrated the capability of making timely student loan payments, have high credit scores in general, and also have high income.
Deferment helps students that cannot pay off student loans. The policy typically comes into play during economic downturns, such as the housing collapse that unfolded towards the end of 2008. Students that receive deferments delay student loan payments for a time specified by the lending institution. The problem with deferment is student loans for bad credit still accumulate interest that makes student loans much more costly to settle.
The Impact of High Interest Rates on Student Loans for Bad Credit
Some finance experts believe that bad credit has an upside for college students seeking loans to cover tuition. The reasoning for the optimism stems from the high interest rates charged by lenders to cover for the risks of issuing student loans for bad credit applicants. Lenders view student loans in the same light as they view commercial and personal loans: the higher the risk, the higher the interest charged on the loan. Higher interest rates generate enough revenue to offset the losses caused by loan defaults.
The Bottom Line on Student Loans for Bad Credit
Students that possess credit scores that fall below 619 can expect difficulty in securing student loans with bad credit. The federal government provides an outlet for bad credit student loans, with need-based student qualifying for college financing. Most private lenders prefer to reap the profits from personal and commercial loans, instead of exposing their balance sheets to risky student loans with bad credit. Both the federal government and some private lenders package student loans with bad credit. However, lenders that approve student loans for bad credit charge much higher interest rates that make the loans cost prohibitive for college students.