Student Loan Underwriting: How It Works

Underwriting is a process used by lenders to evaluate a borrower’s creditworthiness before approving and issuing a loan. Like what’s done for other types of loans, the underwriting process employed by lenders for private student loans focuses on your ability and willingness to repay the loan. 

Notably, federal student loans don’t require traditional underwriting. Approval, loan terms, and the interest rates you’ll receive for federal student loans are not centered on your credit or income. 

Read on to learn more about student loan underwriting, including some of the key differences between federal and private student loans.

How does student loan underwriting differ for federal and private student loans? 

	Federal	Private
Issuer	Government	Lenders
How to apply	FAFSA	Lender application
Credit check required?	No (except Direct PLUS loans)	Yes
Eligibility based on	Financial need and meeting basic requirements	Ability to pay
Does credit affect rates?	No	Yes

The federal government issues federal student loans, whereas companies like banks, credit unions, and other lenders originate private student loans. 

The underwriting process for a private student loan requires you to submit a loan application and provide details about your financial condition to determine your approval for your loan as well as your rates and terms.

Federal student loans don’t require this same type of underwriting. Instead, you’ll complete the Free Application for Federal Student Aid (FAFSA) form. Anyone who meets the government’s basic eligibility criteria will qualify for a federal student loan, regardless of their credit or income.

Private lenders set their rates based on economic conditions and the borrower’s credit. Everyone gets the same fixed interest rate for federal student loans. While the federal fixed rate changes each year depending on the economy, the rates on the previous loans you’ve received will never vary.

Underwriting for federal student loans

When evaluating your federal student loan application, the government doesn’t consider your willingness or ability to repay. Instead, it focuses on ensuring you meet basic eligibility criteria, such as:

• Demonstrating financial need for need-based federal student aid programs
• Being a U.S. citizen or eligible noncitizen with a Social Security number
• Being enrolled or accepted in an eligible degree or certificate program
• Maintaining satisfactory academic progress in college or career school
• Sharing your federal tax information on the FAFSA form
• Not being in default on a federal student loan or owing money on a federal student grant
• Agreeing to only use federal student aid for educational purposes
• Showing you’re qualified to obtain a college or career school education

This means you can qualify for a federal student loan regardless of your credit history. 

Importantly, a credit check is required to determine if you have an adverse credit history for direct PLUS loans issued to parents, graduate students, or professional students. However, you can still qualify by adding an endorser to the loan. 

Underwriting for private student loans

While each lender sets its standards, the private student loan underwriting process generally focuses on your willingness and ability to repay the loan. 

Once you submit your application, the underwriting process begins, during which the lender carefully reviews your credit history and score, income, and existing debt to evaluate your financial situation and creditworthiness. 

These factors determine if you are approved for the loan and the rates and terms you qualify for. 

The length of the borrower’s credit history of on-time payments will directly affect the lender’s risk assessment, which drives the loan approval and terms.

Jim McCarthy

CFP®

In the following sections, we’ll review common underwriting guidelines and processes for private student loans. 

What are the basic private student loan underwriting guidelines? 

Guideline	Typical requirement
Credit score	600 – 650 minimum
Income	Stable
Debt-to-income ratio	36% – 43%
Cosigner	Allowed for approval or better terms
Educational program	Enrolled
Loan amount	Up to cost of attendance

Credit score

While each private lender sets its credit score requirements, you’ll generally need a credit score of at least 600 to 650 to qualify for a private student loan. You’ll get more favorable rates and terms if you have better credit. So, do your best to get your credit score in good shape.

Income

To qualify for a private student loan on your own, you’ll generally need to have a stable source of income. As with the other underwriting requirements, this varies by lender. However, you’ll typically need to show you’re earning enough income to reasonably afford to repay the loan. 

Debt-to-income ratio

Lenders determine if you can afford the loan by evaluating your debt-to-income (DTI) ratio. This ratio compares your monthly debt payments to your monthly gross income. Generally, it’ll be easier to repay the loan with a lower DTI ratio of 36% to 43% than with a DTI higher than this range. 

Cosigner

If you can’t qualify for the private student loan on your own—or you want a better rate—many private lenders will allow you to apply with a cosigner. Assuming the cosigner has better credit and more income than you, this can be a good way to get approved and receive a lower rate.

Educational program

Before you’re approved, most lenders will confirm your enrollment in an acceptable educational program (e.g., a degree or certificate from an accredited college or university, career school, or trade school). You can expect the lender to contact your school directly to confirm your enrollment. 

Loan amount

Not only does the size of the private student loan you can get depend on how much you can afford to repay, but many lenders also limit the loan amount to your annual and total cost of attendance (COA). This includes how much you’ll pay for such things as tuition, books, and living expenses. 

If you don’t qualify for a private student loan or a good rate on one, the only viable option is to get a cosigner with a better credit profile and income source(s).

Jim McCarthy

CFP®

What is the student loan underwriting process?

The student loan underwriting process is a series of steps that lenders take to assess the borrower’s creditworthiness and determine their eligibility for the loan. The process typically includes the following steps:

1. Application: The borrower applies for the private student loan online.
2. Verification: The lender verifies the borrower’s identity and income information.
3. Credit check: The lender checks the borrower’s credit history.
4. Income assessment: The lender assesses the borrower’s loan repayment ability.
5. Loan decision: The lender decides whether to approve or deny the loan.

Borrowers typically find out whether they’re approved for a student loan within a few minutes of submitting their application. However, the process may take several days or weeks if the borrower’s credit history is complex or the lender must verify additional information.

Additionally, you may need to wait to receive the loan funds until the start of the term (e.g., the weeks leading up to it). So, if you apply for the loan early, remember that you may not receive the loan proceeds until close to when the semester is scheduled to begin. 

It’s important to note that technology is changing the traditional underwriting process in several ways. For example, many lenders now use automated underwriting systems to assess borrowers’ creditworthiness more quickly and efficiently, speeding up the approval time. 

Plus, lenders commonly use data analytics to identify borrowers with a higher risk of default. Lenders use this information to set appropriate interest rates and loan terms, helping borrowers avoid default by only issuing loans they can reasonably afford to repay.

Common challenges in student loan underwriting

While private student loans can be a good way to finance your education, the underwriting process can be challenging. Common challenges include credit issues, such as low credit score or no credit history, as well as income instability and a high debt load. 

If you’re facing any of these challenges, don’t give up. Talk to your lender about your options and see what they can do to help you get approved (e.g., adding a cosigner to your loan). 

Here are some common hurdles private student loan borrowers face and what they can do to get past them:

Credit issues

If you don’t have a credit history, or your credit history is poor, you may have difficulty qualifying for a private student loan. You may need to add a cosigner to your loan to get approved. 

Some good ways to improve your credit score include making on-time payments, reducing your debt, and avoiding new credit applications.

Even if you don’t have any debt, you can start building an alternative credit history (which some lenders accept) by making on-time payments on your bills, like rent or utility bills. Plus, you can build traditional credit by getting a credit card and using it responsibly (e.g., repaying it monthly).

Income instability

If you have an unstable income, you may have difficulty qualifying for a private student loan because lenders want to make sure you can repay the loan. A good way to resolve this issue is by adding a cosigner with a steady income to your loan. 

High debt load

Having a lot of debt can make qualifying for a private student loan challenging. This is because one of the primary measures lenders evaluate is your DTI ratio, which is a ratio of your monthly debt obligations to your gross monthly income. 

You may need to add a well-qualified cosigner to your loan if your DTI ratio is too high. Additionally, you can try to reduce your debt load by paying down your existing debts.