How bad credit affects your student loans

The good news is that having bad credit won't generally impact your ability to get student loans as student loans are often seen as 'good debt'. Good debt is debt that is used to finance what will hopefully lead to more income down the line. Mortgages, student loans, and some business loans are seen as good debt as their purpose is as an investment. While bad credit will affect almost all loans in terms of the interest rates you'll receive, student loans are mostly attainable no matter what a student's credit history or score is.

Keep in mind however that having no credit is actually better then bad credit when applying for most student loans, a concept seen nowhere else in the financial loan world. If you are afraid that you have bad credit and that it may affect your ability to get funding for college, read on to see how you can still get funding and what might and might not be affected by your credit.

First of all, any money for college that comes from grants or scholarships is not affected by credit because money from grants and scholarships never need to be repaid; therefore your ability to repay is not a consideration. Federal loans should be your first consideration for student loans, regardless of your credit history. These loans have low interest rates and rarely involve a credit check. Rather federal loans are given based on eligibility requirements formed from income history, family income, current education level, expected graduation date, and so forth. You can fill out a Free Application for Federal Aid online at http://www.fafsa.ed.gov/ for free. This FAFSA form will help determine eligibility for your financial aid package and allow you to possibly receive grants and federal loans from your college and the government.

Private loans are more likely to be affected by bad credit as private loans are often serviced and disbursed by private banks that have a lot of experience dealing with lending (think credit card companies, mortgage lenders, etc.). Therefore they are more cautious when lending to a student with bad credit and while credit requirements are generally more lenient for student loans, they do still exist. If you have bad credit and need a private loan you may receive one with a higher than average interest rate or be outright denied for the loan.

If you are denied for a student loan due to bad credit, you may need to have a cosigner apply for the loan with you. A cosigner is a person with an established credit history (and hopefully a high credit score) who agrees to sign with you for your student loan. By signing this credit worthy person is agreeing to pay some or all of the loan back if you are unable, default, or drop out of school. It is a serious financial risk for a person to agree to be a cosigner, so don't be surprised if some potential cosigners turn you down; after all if you have bad credit (remember bad credit is completely different from no credit) there may be a reason for concern that you'll default on a loan.

If a cosigner can't be found you may be offered the option of a PLUS private loan. These loans are designed for parent's of a student and are loans taken out in the parent's name on behalf of the student. The student has no obligation to repay the loans, rather the responsibility falls on the parents who sign for the loan. An advantage here is that that parent(s) credit is considered for the loan, meaning the chances of approval may be higher. Again, it is a big decision for a parent to agree to sign for a loan for which the student will not be held responsible, but it is a consideration if your loan application is turned down and you can't find a cosigner.

If none of the above options lead to an approved private loan and you've exhausted all federal grants and loans as well as all financial aid from your school and still come up short, you'll need to continue shopping around for a private loan but with bad credit you may continue to be rejected or face higher interest rates. Planning ways to make extra money for school such as a part-time job, asking for more aid from your school, or taking less credits per semester may be options to help you fund your tuition bill. Do not use a credit card to pay for education as the interest rates are often higher than even private loans and defaulting on credit card balances can wreak your credit for years to come.

Also keep in mind if you have 'no credit' which means that you have no credit history, this does not mean you have bad credit. In the case of student loans, most companies will extend a loan to someone with no credit history or a minimal history. Some may still require a cosigner but whether they do or not, the loan interest rates are generally lower then for someone with bad credit.

Whatever your situation is, finding money for college can take some time and multiple tries but overall most students do find sufficient funding for their education and student loans are usually the easiest loans to get access to if used for education uses only.