Everyone, or almost everyone, knows what a student loan is – a loan that helps students to pay for their college education and associated needs, such as living expenses, books, and other supplies. But most people are unaware of the credit requirements that come along with these loans.
If you’re looking to borrow money for school, there’s a good chance you can do so whether your credit score is high, low, or practically non-existent. Credit requirements only come into play when you consider federal vs private student loans.
According to financial aid experts, you will need a credit score of 800 or thereabouts to get a private student loan with the lowest interest rates. A score of 700 or thereabouts will still get you a private student loan, but with higher interest rates. But anything below 620 is highly unlikely to get you qualified for any kind of student loan.
So, if you are not interested in a private student loan with an interest rate as high as 18%, what other options do you have?
Federal Student Loans
Federal student loans have been specifically designed to help students pay for their college education, and the good news is that they are not based on the beneficiary’s credit score whatsoever. In fact, you don’t need to undergo a credit check to qualify for one.
And that’s not all; they generally offer lower interest rates, more protection for beneficiaries, and better repayment terms when compared to private student loans. That is why a federal student loan should be your first option, especially if your credit history is questionable or non-existent.
Generally, there are two types of federal student loans, and they include:
- Need-based federal student loans
- Non need-based federal student loans
Need-Based Federal Student Loans
So far, need-based federal student loans remain the best option regardless of whether the recipient has a good credit score or not. As expected, you will have to fill out the FAFSA (Free Application for Federal Student Aid) whereby you’ll be required to provide information in regards to both you and your parent/guardian’s financial situation. Based on the information you give, the government will make some calculations to settle on your expected family contribution, and also to determine how much you are eligible for.
There are two types of need-based federal student loans, and they are:
- Federal perkins loans
- Federal direct subsidized loans
Non-Need Based Federal Student Loans
Non-need based federal student loans are ideal for students whose parents/guardians cannot afford the entire cost of college education. These kinds of loans are usually directed towards students who don’t qualify for need-based loans. They come at higher interest rates, but they can be borrowed at higher amounts.
There are two types of non-need based federal student loans and they include the following:
- Federal direct unsubsidized loans
- Federal parent PLUS loans
Unfortunately, while federal student loans offer more favorable lending terms, they sometimes don’t offer enough funds to cover the ever-spiraling costs of college educations. As a result, some students opt for private loans to cover to seal the gap.
It is estimated that more than 14% of undergraduate borrowers are beneficiaries of private student loans.
As we have already seen, private lenders will require your credit history and credit score to determine if you qualify or not. These loans offer higher interest rates when compared to federal loans, and often less favorable borrowing terms.
In spite of everything, it is still possible to acquire a private student loan with a poor credit score, but the interest rates will be higher than usual. Private lenders may also require you to have a cosigner. In some cases, it would be totally impossible for you to get a private student loan without a cosigner.
In conclusion, while it is still important to maintain a good credit score and history as a young adult, your credit score won’t matter much when it comes to borrowing a student loan, unless you intend to borrow a private loan.