Student loans are the one corner of consumer finance where your credit score doesn’t always dictate your ability to borrow. Federal student loans are that rarest of financial products: So long as you’re enrolled in an institute of higher education, you can borrow most federal loans without providing a credit history. Private student lenders, on the other hand, require credit scores. The higher your number, the lower your interest rate.
Credit scores analyze your likelihood to repay debt, and the three-digit grade is a staple of lenders’ underwriting. “The general trend has been toward requiring higher and higher credit scores,” says Mark Kantrowitz, publisher of Savingforcollege.com.
Read on to learn more about how your credit score affects your chances at qualifying for a student loan.
Applying for student loans
Eligibility for federal student loans is straightforward. You must be a U.S. citizen, and you must be enrolled at an approved institution. To land a federal loan, you need to fill out the Free Application for Federal Student Aid (FAFSA).
The federal government imposes limits on student borrowers. For “dependent” students — those who still rely financially on their parents — the limit is $5,500 to $7,500 a year and a cumulative total of $31,000, according to the U.S. Department of Education. For independent students, the annual limits are higher, and the cumulative limit is $57,500 for undergraduate students and $138,500 for graduate students.
If your financial needs exceed those limits, private lenders also offer student loans. Applying for that money will require a credit check or a co-signer, but you’ll also have access to more funds — sometimes up to 100 percent the cost of attendance — so they’re a great way to supplement any federal financial aid.
Do you need good credit for a federal student loan?
No. In fact, you don’t need any credit history to get most federal student loans. That makes sense: Many people entering college have yet to establish credit histories, so if the federal government were to begin scrutinizing borrowers’ creditworthiness, the student loan system would grind to a halt. “Oftentimes the student has a thin or nonexistent credit history,” Kantrowitz says. “Or if they have a credit history, it’s usually a bad one.”
If you’re a borrower, let this lack of scrutiny serve as a yellow light: You can borrow tens or even hundreds of thousands of dollars over the course of your college career, but you’ll have to pay it all back with interest.
The exception to the rule is federal PLUS loans — with these, you will have to go through a credit check, although there is no minimum credit score requirement.
Credit score needed for a private student loan
To secure a private loan, you’ll typically need a score of at least 650 or a co-signer (typically a parent) with a score in that range, Kantrowitz says. However, he adds that knowing the precise cutoff is tricky, because private lenders consider their credit-score guidelines a trade secret.
The only way to find out if you qualify is to apply. Most student loans go to borrowers with good to excellent credit. According to the Consumer Financial Protection Bureau, more than 57 percent of student loans made in 2018 (the latest year available) were issued to borrowers with credit scores of 660 or higher.
Some lenders offer prequalification, which allows you to see if you are eligible for a student loan without the lender pulling a hard check on your credit. Take advantage of these offers as much as possible when shopping around with private lenders.
Can you get a student loan with bad credit?
Most federal loans (with the exception of PLUS loans) are made without credit checks, so a spotty credit history poses no obstacle. However, if you’re applying for private loans, your credit score will come into play.
If you have bad credit, recruit a parent as a co-signer. In this scenario, the lender will evaluate your co-signer’s credit history in addition to your own, potentially reducing your interest rate. The downside is that the co-signer takes on partial responsibility for the loan, meaning their credit may take a hit if you fail to make payments.
Credit score needed to refinance student loans
If you’re out of college and paying down your student loans, you might benefit from refinancing. This process can let you consolidate multiple loans, lower your interest rate and shorten or lengthen the term of your loans. If you’re refinancing private loans with a private lender, you will need to pass a credit check. “With anything under 620, you’re not very likely to qualify for a refinance unless you have a creditworthy co-signer,” Kantrowitz says.
If you have a credit score in the mid-600s or below, take a look at your options with lenders that offer prequalification or recruit a co-signer.
Find the right loan for you
There are many benefits to federal student loans, including historically low interest rates, repayment flexibility and borrower protections. And if you don’t have any credit history, your best chance at qualifying for financial aid may be with a federal student loan.
If you’ve tapped the limits of federal loans, shop around for the best rates on private student loans — with the caveat that the credit score of you or your co-signer will determine the rate you pay.
Featured image by fizkes of Shutterstock.