Managing Student Loans

Financing college with bad credit is not a problem for students who qualify for financial aid as they can apply for federal student loans without any credit checks. However bad credit can present problems if additional lending is required through private student loans. Much depends on individual circumstances. Students should be aware that having little or no credit rating is entirely different to having bad credit, which can be a major stumbling block to any lender outside the sub prime lending market.

Having no credit simply means that no credit history has yet been established, whereas bad credit means ones credit score is already blotted through irresponsible use of credit. Bad credit is acceptable when applying for federal student loans through FAFSA, unless one has previously defaulted on a federal student loan. The Federal Perkins loan for students from families on low incomes, and the Stafford subsidized and unsubsidized loans, are granted without a credit check, thus ones credit status is irrelevant.

Parents with reasonable credit histories may apply for the Federal Parent PLUS loan. This loan remains the responsibility of the parent, not the student, but can be useful in mitigating the necessity of private student loans. Standard interest rates are applied to federal student loans, thus having bad credit will not result in higher interest rates. However every other form of college loan available will attract higher rates if one has bad credit.  

Private student loan lenders will be willing to advance student loans to an applicant with bad credit, providing one has a responsible co-signer willing to stand as guarantor. The co-signer will need to have a good credit score and be prepared to assume the payments if the applicant defaults.

However issuers of private student loans will not offer loans to those with bad credit and no-signer. The circumstances are too risky. If a student requires a private student loan and cannot obtain a willing co-signer then improving credit is a necessity. This can take time so may require the student to delay their education.

Another option is open to students with bad credit through peer to peer lending. Social lending sites such as Prosper allow those needing loans which are not readily available through conventional means, to post their circumstances and reasons for needing a loan. Interest rates will be evaluated by a peer lending group. Not every peer to peer lender will consider those with bad credit.

Offers abound from sub prime lenders for loans with bad credit. Students should avoid such offers as interest rates levied will be too high to be sustainable. If the only option available is loans for bad credit then it is more prudent to take the time to improve ones personal credit. It is probably worthwhile delaying college and taking a job to improve both credit and personal finances.

Students seeking college loans should be aware that student loans are non-dischargeable and are subject to repayment even if a college course is not completed. Students with bad credit are advised to think ahead and make every effort to improve their credit prior to applying for any kind of loan.