college

Shopping for a student loan

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Highlights
  • Different credit entities will treat loan inquiries differently.
  • An estimated 50 to 70 percent of private education loans have a co-signer.
  • Students are sometimes reluctant to use the aid office to full advantage.

To shop or not to shop? That's the question when it comes to private student loans.

Every time you apply for credit, the potential lender pulls your credit report. That action can send your FICO score down a few points on average, according to Craig Watts, public affairs manager at Fair Isaac Corp., the company that formulates the FICO score.

The idea is that when someone applies for credit, he is planning to increase his debt load, which makes him a "riskier borrower for the next couple of years," Watts says. 

Multiple inquiries could signal that a consumer is applying for multiple lines of credit. But credit bureaus and score calculators make an exception for consumers applying for home and car loans, provided those applications fall within a set time frame (usually two weeks).

The rationale is that even if you've applied to five banks, you're only going to take out one student loan, so you get hit with one inquiry, not five.

Not so for private student loans.

No consistency on inquiries

And different credit entities will treat the inquiries differently. It isn't consistent across the board, says Watts. (Bureaus also calculate and sell other types of credit scores that aren't based on the FICO model.)

With FICO scores, each bureau calculates its own version of your score, based on the information reported to it. But some will count multiple inquiries made within a short period of time for a student loan as one. Others won't.

"The way the inquiry is coded determines how the FICO score treats the inquiry," says Watts.

In addition, for those who have spotty credit or little experience with credit, those inquiries "may have more impact," says Watts.

But lenders aren't looking for a long credit history with student borrowers, says Harrison Wadsworth, special counsel to the Consumer Bankers Association, an industry trade group. With students, "they're expecting a very thin file," he says. "What they would want to see is nothing adverse."

The average undergrad covers about 7 percent of tuition through private student loans, says Martha Holler, spokesperson for student loan lender Sallie Mae. Students themselves take out more than two-thirds of the loans, while parents account for roughly 29 percent, according to Sallie Mae/Gallup data.

FICO has no plans at present to change the scoring formula so that it automatically groups student loan inquiries as one, says Watts. The purpose of the score is to predict how likely a person is to honor (or walk away from) debt, he says.

"If we go in and start fussing around with the formula based on sociology or politics, the predictive ability would likely drop," he adds.

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But not everyone agrees.

"The problem is that student loans aren't analogous to credit cards," says Luke Swarthout, a higher education advocate with the U.S. Public Interest Research Group. "People don't take out multiple student loan accounts the way they might take out multiple credit card accounts."

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