Getting a student loan with bad credit: What options are there?

Quick insights

• It can be possible to get approved for a student loan if you have a bad credit score.
• There are alternative options to getting a student loan that may be helpful if you have a low score and are struggling to get approved.
• Improving your credit score prior to applying for a student loan could possibly help increase your chances of approval.

The cost of higher education can be a huge hurdle towards getting a degree, which is why many choose to apply for a student loan. Some private lenders may look at your credit score as part of the approval process. But what if you have a bad credit score and are worried about your ability to get approved? Let’s review some options that you may have.

What is bad credit?

Credit score models often have credit scoring ranges that go from poor to exceptional. If your credit score falls in the poor category as referenced by some models, you might feel this is "bad credit." While there is technically no definition of a "bad" credit score, in this article the term "bad credit" refers to low credit scores.

Getting a student loan with bad credit

Getting approved for a student loan with a bad credit score may be possible, but it may be more difficult than if you had a good or excellent credit score.

Credit scores can play a role in determining your eligibility for a student loan from a private lender because they help measure your creditworthiness, or your ability to repay your debts on time. If you have a bad credit score, your potential lender may limit the amount you can borrow or establish a higher annual percentage rate (APR) on your loan. Please note that the potential lender will also consider other factors when setting the terms of the loan.

However, there could be some ways to get a student loan if you have a bad credit score, or even no credit at all, as well as alternative means to help you pay for your education. Let’s review what options you may have when applying for a student loan with low credit.

Types of student loans

There are several types of student loans out there. Depending on your financial situation and credit score, you may want to apply for one of the following below.

Federal student loans

Federal student loans are designed with students in mind, and come with fixed interest rates and flexible payment options. As an undergraduate student, your lender may not run a hard credit check. Graduates, professional students or parents of students may have different terms.

There are a few subcategories of federal student loans, including Direct Subsidized Loans and Direct Unsubsidized Loans. Be sure to review the terms of these loans before applying so that you are aware of how they work and their payment options.

You may need to fill out the Free Application for Federal Student Aid (FAFSA), which allows you to apply for federal student loans. This may require documentation such as employment history, income, Social Security number (SSN) and more.

Private student loans

Private student loans may have variable interest rates, meaning your interest costs could change over time. Private student loans may be a good idea if you have a high credit score so that you can potentially receive a higher loan amount or lower APR. However, you may still get approved for a private student loan if you have bad credit, since many other factors are considered too.

To improve your chances of approval, you may want to add a co-signer, which is a person who will become financially responsible for the payments if you default. Additionally, you may want to compare loan terms across lenders, credit unions and banks. You may find that these financial institutions all offer different types of loans with varying requirements, and some may specialize in loans for those with poor credit.

Alternatives to student loans

Aside from federal student loans and private student loans, there may be other ways to help pay for the costs of education. For example, you may qualify for scholarships. Additionally, you could apply for grants, such as those provided by non-profit organizations. You could also look into work-study programs that may be offered as part of your federal aid package.

Finally, you may want to consider an income-share agreement (ISAs) as an alternative to traditional loans. ISAs are contracts that give students flexible payment arrangements but require them to make payments back in the future by putting a fixed rate of earnings towards the debt for a certain duration.

How to help improve your credit before applying for a student loan

If you have some time before you embark on your education journey or want to plan ahead, you may want to consider improving your credit score prior to applying for a student loan. This may be a helpful approach when applying for private student loans, where a credit score may be required. This strategy can potentially help you get better terms on your loan, which means you could have a lower APR.

To help improve your credit, you may want to consider the following:

• Lower your credit utilization ratio. This is the amount of credit you use against your total available credit. By lowering your credit card balance, you may help lower this ratio. Ideally, it could be beneficial to lower your ratio to about 30% or less.
• Start making payments on time. Payment history can be crucial to your credit score. Making payments on time could help improve your credit score over time.
• Review your credit report. Look for any inaccuracies or potential signs of fraudulent activity and report these to the credit bureaus.

These are just a few of several healthy habits you might consider implementing into your lifestyle. Note that improving your credit score takes time.

In conclusion

Whether you’re just starting out on your college journey or looking to go back and add more credentials, it can be important to manage your credit wisely. With bad credit, you could face some challenges, but there may be alternative options available to you. Additionally you can work towards improving your credit score  prior to applying for a student loan to help improve your chances for approval and more favorable terms.