By Kristy Welsh, Credit Expert at CreditRepair.com
Do you have less-than-perfect credit but still need to borrow money to make it through school? Relax. Because federal student loans are based more on need than credit, it is still possible for people with bad credit to obtain them. If you don’t qualify for federal loans based on need, you might have to go the private route or look into PLUS loans. With these last two options, your credit reports will definitely come into play.
Don’t Stay in the Dark: Know Your Credit Score
Before getting into any loan program, it is important to know where you stand credit-wise. You can get your credit reports for free at AnnualCreditReport.com. The website allows you to view reports from Equifax, Experian, and Transunion. While you can view your reports for free at AnnualCreditReport.com, that site will not provide your credit score.
Once you’ve obtained your three major credit reports from AnnualCreditReport.com, go over them with a fine-tooth comb to be sure there are no errors or instances of unfair or unsubstantiated credit reporting. If there is incorrect or outdated information on your credit report, be sure to get in touch with the credit bureau that listed it and get it removed. Removing inaccurate entries can improve your credit score. All three bureaus allow you to dispute information online at their websites.
You can get a free approximation of your Vantage Score at CreditKarma.com (Transunion score) and CreditSesame.com (Experian score), although no major consumer lenders use those when qualifying new borrowers. For that purpose, go to MyFICO.com to get your real FICO score. The FICO score is the one that really matters to lenders. Credit scores range from 300 to 850 (the comparatively newer Vantage Scoring Model 3.0 also follows this range). A credit score of 750 is excellent; if your credit score is 620 or below, you’re considered a high-risk borrower.
If your credit score is not optimal, you’re still likely to qualify for a Federal Stafford Loan. Since this is a government program designed to assist ordinary people in furthering their educations, this lender doesn’t put as much emphasis on past credit history as a commercial lender would. However, there are some restrictions. According to information posted on the StaffordLoan.com website, “If you are currently in default on any federal student loans, including Stafford Subsidized, Unsubsidized, Perkins or Parent PLUS Loans, you may not be eligible to receive any form of federal financial aid. Contact the U.S. Department of Education for more information on rehabilitating your delinquent or defaulted education loans.”
For the 2014-2015 school year, applicants can qualify for a Stafford Loan for as much as $5,500. That lending limit increases each year by $1,000 until it reaches $7,500; if you are an independent undergraduate, you can receive up to $9,500 a year. With college tuition rising steadily, $5,500 might not cover everything, but it’s a good start to finance your own education. Depending on your income and level of need, the federal government might actually subsidize up to $3,500 of your Stafford Loan—that’s $3,500 you don’t need to pay back.
Remember that whatever you borrow that isn’t subsidized by the Feds is your loan, and you will have to pay back every penny. You do, however, get a six months’ grace period after graduation before you have to start making loan payments, and your loans will not accumulate interest during that time.
Perkins loans are government-guaranteed loans that colleges give directly to low-income students. Perkins loans can be hard to come by—not because of your credit, but because your school might not have the funding to make the loans. Perkins loans do not factor in credit scores when making decisions on whether to lend money. The loan decisions are based mostly upon need with some credit restrictions: You cannot be in default on any other student loan.
Some of the advantages of Perkins loans:
– The interest rate is 5%
– The loan limit is $5,500 per year, $27,500 total
– The loan repayment period is 10 years
– You have nine months from the date you stop attending school, whether successfully graduated or not, to pay the loans back (versus six months for Stafford Loans)
– You can qualify for loan forbearance should you get into financial difficulty
– Interest does not accrue and is not charged while you are in school