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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 loan?

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 debt payments.

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 students
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 federal government.

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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 parents
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.

Useful sites:

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 credit."

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.

Private loans
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.

Consolidation loans
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 loan.

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

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