Does Your Credit Score Affect Student Loans?

Your Credit Score and Student Loans

When it comes to the issue of financing college, student loans are considered to be a vital source of funds for millions of students and their families annually. Due to the unprecedented increase in the cost of tuition fees which is rising at a rate higher than inflation, more and more students are forced to take loans to finance their college education. This leads to an important question: does credit rating affect one in getting student loans?

The short answer to that question is yes, your credit does matter when you apply for private student loans. However, if you are thinking of taking federal student loans, credit history is not considered in determining the qualification. For more details on how credit impacts various forms of student loans, read on.

Federal Student Loans

The federal program offers most of the student loan money via student loans such as Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans for parents and grad students. Another positive note is that your credit score or credit history will not be a factor when you apply for federal student aid, the FAFSA. So, federal student aid is available even if you have bad or no credit at all provided you meet some basic criteria concerning your citizenship status, enrollment status in college, and income level.

The most basic regulation requirements for federal student loans include enrollment status, program of study, prior degree attainment, satisfactory academic performance, and need analysis, such as income levels for need-based federal student loans, and for PLUS Loans, no credit history of bankruptcy or other negative credit rating. However, your FICO score or credit reports are not considered when determining your federal aid. Moreover, federal student loans do not restrict borrowers from accessing their funds because they have no credit history after high school.

The only thing that FAFSA does not look at is credit but it does ask if the student has experienced default determination, bankruptcy discharge, foreclosure, repossession, tax liens, wage garnishment, or write-offs of federal student loans. These may make it difficult for you to meet other federal requirements that enhance your chances of getting more federal aid but they do not affect your credit rating.

Private Student Loans

Private student loans that students receive from banks, credit unions, and online lenders are of a different type. These non-federal student loans for college are underwritten like any other consumer loan product so credit history and score will count.

Each private student loan company is likely to have its own lending policies regarding credit scores and reports. However, in most situations, you will require a credit rating of at least average to qualify for a private student loan. Some lenders offer loans to people with scores ranging from 600s up to 700s. Average approved scores range from mid 600s to low 700s, too.

In the case of private student loans, it is advisable to aim at having a score that is above 700 for the best chance of getting good interest rates and terms. To obtain low student loan interest rates below 6 percent without a cosigner, the better your credit score the better. If a borrower has good or excellent credit, the problems in a cosigner’s credit rating can help increase the chances of qualification.

If your credit score ranges between 500 and below it becomes nearly impossible to get approval for private student loans without involving a qualified cosigner with a better score. From the lender’s view, the lower the score the higher the perceived risk of nonrepayment on the cash they invested in your college education. Having an understanding of how credit scores work and making efforts to establish credit as one progresses can prove useful when seeking private loans for college in the future.

In what ways do student loans help or hinder credit?

Not only is your credit status vital for the approval of some forms of student loans, but the processes involved in student loans also reflect on the creditworthiness of the borrower. Many student loans are reported by credit bureaus of the three major consumer credit bureaus organizations. Federal student loans are not discharged until the loan balance is paid in full, and thus they are disclosed as long as the balance is still outstanding.

Private student loans are also reported on credit reports and remain so until fully paid. Student loan balances constitute a significant share of credit reports of millions of consumers at the very beginning of their credit relationships.

However, student loans affect your scores positively or negatively depending on timely repayment. Federal student loans have flexible student loan repayment plans that help to maintain the loan amounts reasonable. If federal direct loan payments are made on time each month this is helpful to credit as long as the borrower has a responsible history. Late payments hurt scores.

Another disadvantage of private loans is that they give fewer options for paying the loan back if the borrower loses his/her job after college. However, being up-to-date on private loan repayments is evidence of good credit as is any other installment credit such as mortgage or car loans.

In general, the maintenance of student loan balances as small compared to the original loan amounts and overall credit limits also helps to not harm the score. It is also important not to allow loan balances to balloon; as with credit risk scores with credit scoring models.

Therefore, the conclusion is that student loans can improve credit histories for students who otherwise have little credit history. However, if such loans that are not serviced by the investors are left out, they will significantly and quickly pull down credit scores.

How to Build Credit Before College?

If you currently have little or no credit but plan to apply for private student loans down the road, there are proactive steps to build credit responsibly.

• Get added as an authorized user to a parent’s or guardian’s credit card account with their consent because of the favorable credit history.
• Get your student credit card or secured card with a small limit and turn it into a go practice and pay off the balance each month.
• Check out credit builder products available at credit unions and community banks that help build payment history.
• When in college, even the on-campus student jobs can readily afford the opening of the first card, and incremental usage over the years provides the necessary credit history. Avoid having balances or paying interest that will take a toll on tuition or living expenses.

The earlier one learns about credit reports and scores, the better the chances to take positive steps towards improving the credit score and setting the ground for better private student loan eligibility with little or no need for a cosigner. If you have more questions, most college financial aid offices give credit and borrowing advice to students and families who are applying for different forms of student loans and aid.

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