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Special section Beat the bad credit blues

Even with bad credit, you can still get an education.

Don't let bad credit ... impact your student loans

Your credit history and your student loan

Why it's important
Bad credit can affect many parts of your life, but it shouldn't keep you from getting an education. As long as you haven't stopped paying on a previous student loan, you can still get the financial help you need to go to school.

Students can borrow using federally subsidized loans or private loans.

Federally subsidized loans assume the student hasn't established a credit history when applying for school aid, so history is not considered.

This isn't true of a private loan or a federal Parent Loan for Undergraduate Students, also known as a PLUS loan.

PLUS loans are offered to parents and graduate/professional students, and eligibility is not based on financial need, but creditworthiness is considered. The applicant can borrow up to the full cost of attendance minus any financial aid the family or person may receive.

Under federal law, a simple credit check is performed to ensure no adverse credit history is on the individual's account, such as debts that are more than 90 days past due.

There is no credit score requirement for PLUS loans, says Martha Holler, managing director for corporate communications at Sallie Mae. Credit history is considered because the PLUS loan's annual limit is much higher than the limits on Stafford loans.

Stafford loans are based on financial need. The limit varies depending on a student's year in school and whether they are dependent or independent, says Justin Draeger, spokesman for the National Association of Student Financial Aid.

"The maximum annual Stafford loan amount for a dependent undergraduate student is $3,500 for the first year, but independent undergraduate students or dependent students whose parents are denied a PLUS loan are eligible for an additional $4,000 the first year," says Draeger.

With private loans, the rates and terms vary based on creditworthiness. More than likely the interest rates will be higher.

What you can do
Get your annual credit reports from the three major credit bureaus: Equifax, Experian and TransUnion, so errors can be fixed. Get your credit scores, too, so you know where you stand.

Borrowers with newly discharged bankruptcies especially need to check their free credit reports to make certain accounts with debts that were discharged show a zero balance.

Apply for federal aid by filling out the Free Application for Federal Student Aid form, which determines eligibility for grants, loans and work-study programs. That will determine how much you should expect to pay out-of-pocket for your college education and how much financial aid you might receive. Look at colleges you can afford.

If the PLUS loan is denied, contact the lender directly, find out what criteria the loan provider examined and see if it can be worked out. In cases where parents are denied a PLUS loan because of poor credit, the student is offered additional Stafford loans, says Draeger.

Sallie Mae offers counseling for PLUS applicants to help them become PLUS-eligible.

Shop around when considering a private loan, but limit your actual applications to three lenders to avoid multiple credit inquiries that could lower your credit score, advises Nancy Flint-Budde, a Certified Financial Planner in Clifton Park, N.Y. Also, ask the school's financial aid administrator if a list of preferred private lenders is available.

Automatic payment plans and shortening loan terms, from 15 years to 10 years, for example, can reduce the interest rate, says Flint-Budde.

Find out the interest rate, prepayment penalty and whether payments are expected while the borrower is still in school, and take out the smallest loans you can.

-- Posted: Oct. 10, 2007
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