Credit score requirements for student loans – do you need good credit?

Students with insufficient cash to pay for college don’t have to deprive themselves of their dream career. They can apply for student loans to pay for their education. Just like all other types of loans, lenders consider different factors like credit scores when deciding whether to approve an application or not. So, what credit score is needed for a student loan? 

It depends on the type of student loan you want to get. There’s no need for a credit score if you’re applying for a federal student loan. On the other hand, you’ll need a credit score of at least 670 (FICO) if you want to qualify for a private student loan. If you have a thin credit file or have no credit history at all, you need a cosigner with a stable income and a good credit score to qualify. Meanwhile, you need a score of at least 650 if you’re looking to refinance your student loans. 

What are the Types of Student Loans?

Cash-strapped college students turn to student loans to cover their school expenses. If you’re thinking of taking out a student loan, you need to know your options. There are three types of student loans – federal, private, and refinance student loans.

What are Federal Student Loans?

The federal government developed the federal student loans and the US Department of Education acts as the lender while Congress sets its annual interest rate.

Here are the types of federal student loans and how to qualify:

1. Direct Subsidized Loans

Students with “exceptional financial needs” based on federal standards are perfect candidates for direct subsidized loans. It will be determined through the information you supply when you complete the Free Application for Federal Student Aid (FAFSA) form. FAFSA will ask questions about your family situation, such as the income and assets of your parents, and how many you are in the family. 

Undergraduates who are enrolled at least half-time won’t be charged with interest. Furthermore, subsidized loans won’t incur any interest until you graduate. You’ll get a 6-month grace period after leaving school before you start repaying your federal student loan. You won’t be charged interest if you have a deferred student loan (loan payments are postponed for a certain period).

2. Direct Unsubsidized Loans

Your financial needs aren’t factored in when taking a direct unsubsidized loan. Your school will consider several factors such as the cost of attendance and other financial assistance you receive when determining how much you can borrow. You’ll be charged interest even if you’re still in school and during deferment or grace periods.

3. Direct Plus Loans

Parents who need financial assistance for their college students can take out parent PLUS loans. Grad PLUS loans are also available to graduate or professional students. PLUS loans don’t require a credit check or cosigner and offer low and fixed interest rates. They’re not based on financial need and the parents who applied for the loan will be held responsible for the repayment. PLUS loans are available to undergraduate, graduate, and professional students.

4. Direct Consolidation Loans

If you have more than one federal student loan, you can combine them into one through a direct consolidation loan. It has a fixed interest rate that’s based on the average interest rate of all the federal student loans you’re consolidating. 

A direct consolidation loan will help simplify your repayment plan since you’ll pay off a single loan instead of multiple ones. If your previous loans had variable interest rates, a direct consolidation loan will use their average as a fixed interest rate, and you can choose to lower your monthly payments by opting for a longer loan term.

What are Private Student Loans?

While federal student loans come directly from the government, private student loans are issued by banks, credit unions, and online lenders. Many students take out private loans to cover other school expenses once their federal student loans run out. The loan amount and loan terms vary by lender. Lenders that offer private student loans have different interest rates but are generally higher than the interest rates of federal student loans.

When applying for private student loans:

  • You need to have a good credit score.
  • If you have a low credit score, you need to have a cosigner who has a good credit standing and a stable source of income.

Please refer to the table below for FICO and VantageScores.

What is Student Loan Refinancing?

If you already have student loans but struggle to pay them off, you should consider taking out a student loan refinancing. Private lenders, such as PenFed Credit Union, will pay off all your existing loans using the new loan with new terms that you take out from them. Student loan refinancing is a good option if the new loan comes with a lower interest rate and monthly payment compared to your existing student loans.

Credit score requirements vary between lenders. You must have a credit score of at least 650 to be eligible. You’ll have better chances of getting approved if you have a higher credit score. Lenders will also consider your debt-to-income (DTI) ratio. You must have a DTI of 50% or less if you want lenders to consider you as an appealing borrower. If not, you’ll need a co-signer who meets the requirements. Keep in mind that if you refinance federal student loans, you’ll lose significant benefits like a chance for loan forgiveness or salary-based payment.

What is the Maximum Amount You Can Borrow for Student Loans?

If you’re an undergraduate, you can borrow as much as $12,500 annually or a total of $57,500 on a federal student loan for the whole duration of your course/degree. If you’re a graduate or professional student, the maximum loan amount you may get is $20,500 annually or a total of $138,500.

The average cost of education for the year 2020-2021 at private colleges came to $37,650. For public colleges, the average cost of tuition and fees was $10,560 for in-state residents and $27,020 for out-of-state residents. These figures show that federal student loans aren’t enough to cover college education and that’s why many people take on additional debt such as private student loans.

The maximum amount you can borrow on a private student loan varies by lender. In most cases, the loan amount won’t exceed your school’s cost of attendance.

Federal student PLUS loans have no caps on the amount you can borrow. It will depend on your school’s cost of attendance less the other financial loans you or your parents have.

If you’re thinking of taking out a student loan but want to know how long it will take to pay it off, here’s a student loan calculator you can use. It’ll give you an estimate of what your monthly payments will be based on the loan amount, loan term, and interest rate.

Where Can You Get Student Loans for Bad Credit?

Unlike all the other types of loans, you don’t have to worry about your credit score if you’re looking for student loans. You can still get a shot at securing a student loan even if you have bad credit.

You should consider taking out a federal student loan if you have bad credit since credit checks or cosigners aren’t required. You still have to satisfy other requirements but your credit score or a lack of it won’t be a problem. Federal loans have a fixed interest rate regardless if you have a bad or excellent credit score.

You may still apply for private student loans if you have bad credit. However, your interest rate will be higher than those with good credit standing. In many cases, private student loans are used as a supplement when student loans aren’t enough to cover educational expenses.

How Can You Build Up Your Credit Score to Qualify for Student Loans?

When you build up your credit score, you’ll have better chances of getting a loan. You’ll also have access to lower interest rates and more options.

  • Get on the electoral register – Lenders will find it easier to verify your identity if you’re on the electoral register.
  • Use your credit card responsibly – A credit card comes in handy as it allows you to make purchases and pay for them at a later time. Be sure to use it responsibly and make payments in full and on time. Late or missed payments can negatively affect your credit score. Lenders consider your payment history when deciding whether to approve your loan application or not. If you want higher chances of getting approved for a loan with a low interest rate, always pay on time.
  • Don’t max out your credit limit – Use your credit card only when necessary and avoid maxing it out. You need to maintain a debt utilization ratio below 30% to improve your credit score.
  • Pay your bills on time – Payment history plays a huge role in calculating your credit score. You should pay all your bills on time so that you can increase your credit score.

How Can Student Loans Affect Your Credit Score?

Just like any other loan, student loans will appear on your credit report. All payments you make, whether timely or late, will be recorded, and that’s why you need to be responsible for making all due payments on time. Regular and timely repayments will help you build or improve your credit standing. It will help you make a better impression on lenders thereby increasing your chances of getting approved for other types of loans in the future, such as mortgage and auto loans. Poor credit history will lead to fewer loan options and a higher interest rate because you’ll be considered as a high-risk borrower.

In case you’re having problems paying back the loan, talk to your creditor right away. If you’re on a federal student loan, ask if you qualify for a salary-based repayment plan or deferment until you get your finances back on track. If you have a private student loan, negotiate a repayment plan that you can afford.

Tips for Securing the Best Student Loan

Before you apply for a student loan, ask for help from your family first. You can also check if you’re eligible for a scholarship or a financial grant. Think about finding a part-time job while studying. If all these options are not possible, then you can look into student loans. There are various student loan options in the market today and you need to know how to find the best one.

  • Determine how much you need – You should have a good idea of how much you need to borrow and make sure you only apply for that amount.
  • Complete the FAFSA form – Don’t forget to complete the FAFSA form. The deadline for submission depends on where you live, so be sure to visit StudentAid.gov to know the deadline in your state.
  • Know your options – You can choose from federal student loans and private student loans. The former is a good option if you’re worried about your credit score. However, if you have a good credit standing and you already have a federal student loan but still need more financial assistance, a private student loan may very well be what you need.
  • Always compare – Compare all the options you have. Take a closer look at the interest rates, loan terms, and monthly payments. Use an online student loan calculator to determine how much you’ll pay every month based on the loan amount and interest rate.
  • Don’t forget your payment deadline – You’ll pay your student loans every month and you need to know the deadline. Remember, you need to make timely payments if you want to build or improve your credit score. You don’t want to ding it just because you forgot the due date.

Conclusion

A student loan is an excellent option if you need financial help for your college education. You can choose from federal student loans or private student loans. Federal student loans are common because it doesn’t matter if you have a bad or excellent credit score. On the contrary, private student loans will require you to have a good credit score to be eligible. Deciding which one is the best option for you will depend on your current financial standing and unique personal needs.

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