How credit scores impact some student loan approvals
By Michelle Crouch
Planning to apply for student loans? You might
want to check your credit.
If you're applying for a federal parent PLUS loan,
a student PLUS loan to pay for graduate school or if you need private student
loans to cover a funding gap, your credit history will come into play. And that can create problems for some
"I've been hearing about a lot of people in their
teens and 20s who don't have credit cards because they don't want to pay
interest," says Liz Weston, a personal finance columnist for MSN Money and
author of "Your Credit Score." "That can mean they don't even have a
credit score. It's tough to get a private loan if you don't have a credit score."
Fortunately, the most common types of federal
loans to pay for undergraduate education -- Stafford and Perkins loans -- don't
require a credit check. Experts say those should be your first choice because
they offer lower long-term interest rates, better repayment terms and more
protections for borrowers.
PLUS loans use your credit score
Federal PLUS loans, available to parents of
undergraduates and to graduate students, also offer protections for borrowers.
However, the government will check your credit to
determine your eligibility, says Isaac Bowers, senior program manager
of educational debt relief and outreach at Equal Justice Works, a Washington,
D.C.-based nonprofit. You will be denied
if you have what the government calls an "adverse credit
history," which it defines as being more than 90 days late on any debt, or
having debt within the past five years subjected to default determination,
bankruptcy discharge, foreclosure, repossession, tax lien or wage garnishment.
Your numerical credit score isn't a factor, Bowers
notes, so you can get PLUS loans even if you have an iffy credit score. And if you do have an "adverse credit history"
under the government definition, you can recruit a creditworthy "endorser" or a
co-signer and still get the loan. But think carefully about that, Bowers warns,
"because that person will be on the hook for your loan."
private student loans use your credit score
While federal loans typically have more favorable
terms, they don't always provide enough money to cover the spiraling costs of
college, so some students have to turn to private student loans to cover the
gap. The Project on Student Debt, a Washington, D.C.-based nonprofit, estimates
that about 14 percent of undergraduate borrowers carry private student loans. Private
lenders do use your credit score and your credit history to determine your
eligibility for their loans, and they typically offer higher interest rates and
less favorable borrowing terms to those with lower credit scores.
BIG LENDERS TURNING YOU DOWN?
TRY THESE INSTEAD
- Credit unions. Especially if you're already a member, they tend be more forgiving
of credit problems.
loan programs. Often have better terms and are more willing to accept borrowers
with minor credit issues
lending. Websites facilitate loans between students and strangers or family
You need a score in the 800s to get the best possible
rates on a private student loan, says financial aid expert Mark Kantrowitz,
senior vice president at Edvisors.com, which publishes more than a dozen
websites about planning and paying for college. "And if you have a score under
620, it's almost impossible to get one." Private loans may tempt students with
interest rates that start as low as 3.4 percent, but those are variable rates
that can spike over the length of the loan. For those with poor credit, rates can
be as high as 18 percent. Private lenders may also consider adverse events in
your credit history, your earning potential and your debt-to-income ratio, Kantrowitz
says, when deciding whether to approve your loan request. If they have concerns, they, too, may require
you to get a co-signer. In that case, they base eligibility and the interest
rate on the credit score of your co-signer.
repair your credit before you apply
Remember, federal loans are the best option and
offer the best terms, so you should always start there. But if you think you're
going to need other types of loans in the near future, it's a good idea to take
action now to build or repair your credit. Experts recommend the following
your credit. At least six months before you apply for any loans, request a
copy of your credit report from the three reporting agencies through AnnualCreditReport.com
(available free once a year from each credit bureau). Dispute any errors you
find. If you want to know your actual FICO score (a good idea), go to myFICO.com,
pay the $19.95 fee, and request it from the three agencies.
a secured credit card. If you don't already have one, apply for a credit
card to start building your credit history. If you don't qualify because you
have no history or have a poor history, Weston recommends a secured card, in
which you give the bank a deposit that becomes the credit line for the account.
bills on time every time. Your bill payment history comprises 35 percent of
your FICO credit score, so sign up for automated payments, email payment reminders
or whatever it takes to make sure you don't miss a payment, says Anthony
Sprauve, spokesman for myFICO.com, the consumer education division of FICO.
from your limit. For the best credit score, keep all of your debt to less
than 20 percent of your total available credit, Sprauve says, and also try to
keep each card's debt to less than 20 percent of the card's limit. When paying
off card debt, focus on the card in which you're closest to the limit. "The
credit-scoring formula is incredibly sensitive to how much of your available credit
you're using," Weston says. "If you charge a lot on one card and get close to your
credit limit each month, even if you pay it off in full, you may be better off
getting another card (and increasing your available credit) and distributing your
purchases between them."
authorized user. If a parent or another relative of yours has a great
credit history, ask if you can be added as an authorized user. Some card issuers have a policy of exporting
historical data from one cardholder to the files of all authorized users on the
account, which can boost your credit score as well. "Some issuers will only do
it for spouses; others do it for anyone," Weston says. "If you want to make
sure it will help, have your parent call and ask first."
if you've maxed out your federal financial aid and you're having trouble
getting a private student loan, it may be a sign that you're spending more than
you should. "In many cases, if you can't get that private student loan, that
means you need to switch to a less expensive school or economize in other ways,"
Kantrowitz says. "Your total debt at graduation should be less than your annual
starting salary once you graduate. If it exceeds that, you're going to struggle
See related: Will card debt scare off student loan lenders?, FICO's 5 factors: The components of a FICO credit score
Published: July 29, 2013