How to Get a Student Loan With Bad Credit Scores

Student Aid Regardless of Financial Well-being

Student loan guaranty companies are a critical component in the federal student loan system. Ironically their purpose is vastly misunderstood, even ignored. Guaranty companies are the middlemen between the federal government and student loan lenders. Lenders risk the loss of millions of dollars in defaulted student loans when incapable borrowers are unable to repay their loans. Thanks to the guarantors, insurance fees are bundled with each federal loan for the express purpose of covering lender risks. Simply put, when a borrower defaults on a loan made through a Federal Family Education Loan Program (FFELP) lender, the guaranty agency automatically pays off the lender and assumes responsibility for the loan.

Don’t Be Duped

Borrowers that shop specifically for “bad credit student loans” must beware. The financial market teems with scams and blatantly disreputable lenders that play on financial weakness. A “bad credit” rating typically renders a borrower ineligible for traditional loans of any type, but in the case of student loans it’s another thing entirely.

If you are unclear about the types of federal student loans available and their terms and features you might read my article “Direct, Federal and Alternative Student Loan Programs and Applications” before you read further.

Can-Do Loans

No reputable lender willingly advertises loans to borrowers with bad credit. However, “bad credit” may refer to borrowers with little or no credit history as much as it may apply to those with poor credit records. Student loans that require no credit check are extremely limited.

The Stafford Loans are the most widely disbursed student loan. They are also the number one option for borrowers seeking shelter from credit checks. Both subsidized and unsubsidized Stafford Loans typically are free from any credit requirements. And almost all students qualify for varying degrees of funding. On the other hand, the Stafford Loans might afford borrowers only a fraction of the total cost for tuition. In such cases borrowers must shop elsewhere for further sources of funds.

Perkins Loans are meted out to very financially disabled students directly through their college campus. The loans are federally funded and like the Staffords, require no credit check. The amount of the award is dependent on other federal aid awarded, but the maximum amount is $4,000.

Alternatives for Bad Credit Borrowers

A borrower with bad credit is not ineligible for credit-based student loans, per se, instead he or she is often ineligible on their own merit. Almost all FFELP lenders extend credit-based federal student loans, such as the Parent PLUS and Graduate and Professional PLUS, to lenders with a creditworthy co-borrower. A co-borrower, often called a co-signor, may be almost anyone with whom the borrower is acquainted, including family or friend. In some cases a co-borrower with very good credit can earn a primary borrower attractive interest rate discounts. Repayment perks that release a co-borrower from the loan once so many consecutive payments have been made on time allow borrowers with little or no credit to build or repair their own.

At the intersection of personal finance and student loans is a confusing mass of reputable and unseemly lenders. Borrowers with less than stellar credit must face their financial fears head on or risk being taken. Options for affordable student loans, federal or private, are available, but borrowers are best advised to stick close to the standards and ask plenty of questions.