Your credit score could cost you on student loans
Just how high
does your credit score have to be to get a private student loan?
For that matter, how good does it have to be to get any student
It depends. Your credit history -- or lack of one
-- doesn't matter for some types of student loans. But for other
student loans, don't apply until you're current on all your other
For simplicity's sake, we'll divide student loans
into four categories:
- Government-backed loans for students
- Government-backed loans for parents
- Private loans that aren't backed by the government
- Consolidation loans
Government-backed loans for
The most popular type of student loan is the Stafford loan. With
a Stafford loan, the student is the borrower. The lender sometimes
is a financial institution such as a bank, and sometimes it's the
Most people who take out Stafford loans have little
or no credit history. So when you apply for a Stafford loan, the
lender doesn't look at your credit report.
That means that you could have no credit history
at all, or your credit score could be in the toilet, and you could
still qualify for a Stafford loan.
Another federally guaranteed student loan, the Perkins,
is for the neediest students. With a Perkins loan, the school is
the lender but the federal government supplies the money. Your credit
history doesn't matter when you apply for a Perkins loan, either.
There is an exception to the rule about credit history:
If you already are in default on a student loan or you owe money
to the federal government, you can't qualify for a Perkins or Stafford
loan until you clear up your financial problem with the government.
Government-backed loans for
The federal government limits the amount that a student can borrow
via Perkins and Stafford loans. Sometimes parents of undergraduates
are expected to pick up the slack. They can borrow via PLUS (Parent
Loans for Undergraduate Students) loans.
The lender (whether it's the federal government or
a financial institution) doesn't look at credit scores when deciding
whether to award a PLUS. But credit history does play a role: The
lender looks at the credit history to see if the borrower has "adverse
If you're 90 days' delinquent on a payment, or if
you're currently in default on a loan, you have adverse credit in
the eyes of a PLUS lender, and you won't get a loan.
On the other hand, even if you have a lousy credit
history and a low credit score because you haven't made payments
on time, you can still qualify for a PLUS. You just have to make
sure that you aren't delinquent or in default on any loans at the
time you apply for the PLUS.
You might notice that the credit standards are awfully
loose for Stafford, Perkins and PLUS loans. There are two main reasons:
First, the loans are intended to broaden access to colleges and
trade schools, not restrict access. Second, student loan debt is
rarely forgiven in bankruptcy. The feds are efficient at making
sure student loan debt is paid.
Some people, especially graduate students (and particularly law
and medical school students), have to come up with more coin than
they get from their income, Stafford loans, rich uncles and other
sources of money. They can turn to private lenders.
Since a private lender won't be bailed out by the
federal government if you bail on your payments, the lender will
want to know your credit history. Private lenders will tailor your
interest rate and fees to your credit score.
But that's not all. Not only are they looking at
the borrower's credit history, but at the borrower's expected future
income. A bank might lend money on better terms to a medical student
than to someone who's getting a doctorate in English literature.
What if you have a not-so-sterling credit history?
You still might be able to get a loan, but you'll have to pay higher
interest and fees. Even then, you can play the system to your advantage.
Take the case of a law student in New York who calls
himself John English. That's not his real name, but when he was
making discreet inquiries about private loans that's the name he
used so lenders wouldn't be biased against him when he signed his
real name on a loan application.
His problem was his low credit scores. They were
pretty bad -- in the 500s -- and he decided to rehabilitate his
Equifax score, which was higher than his Experian and TransUnion
scores. He challenged creditors to prove derogatory information
on his credit report and he boosted his Equifax score to 657. That's
not terrible, but it's not great, either.
Using his pseudonym, he asked several lenders if
they would use his Equifax score. He found a match in Sallie Mae,
the nation's leading provider of student loans. Sallie Mae agreed
to consider only his best credit score, the one from Equifax, and
in a ranking of excellent, good, or fair, his 657 was graded "good."
He was approved for a $25,000 loan at terms he could live with.
If you have multiple loans, you can roll them into a federal consolidation
loan so you have to make just one payment a month. It's like refinancing
a mortgage: The original loans are paid and you get a new loan for
the combined balance with a new term and often at a different interest
rate and conditions.
With consolidation loans, some lenders check your
credit record and some don't. Sallie Mae's Smart Loan, which is
used to consolidate federally guaranteed student loans, does not
require a credit check.
With consolidation loans from the federal government,
it depends upon whether you borrowed directly from the federal government
or from a private lender through the Department of Education. If
you want to consolidate loans directly from the federal government,
the feds just check to see whether you're in default on any student
loans. If you are in default, you'll have to do some explaining
and make some promises before the government approves a consolidation
If you applied through the Department of Education
but your loan is from a private lender, that lender might or might
not choose to look at your credit report. If the lender checks and
denies a consolidation loan, you still might qualify for a consolidation
loan directly from the government. But be prepared to make those
explanations and sign those promises.
And remember what happens if you don't pay your student
loans: The federal government can hire a bill collector, gobble
up your federal tax refunds, and even garnish your wages. If you
declare bankruptcy, your education loan probably won't be forgiven
(it's a myth, though, that student loans are never forgiven in bankruptcy).
The feds have ways of making you pay. You just choose
whether they have to do it the easy way or the hard way.
-- Posted: Sept. 4, 2001