A higher credit score helps you receive a lower interest rate for student loans. (iStock)
Credit scores are one way for lenders to gauge a consumer’s ability to repay debt, including credit cards, mortgages, and student loans.
A higher credit score and longer credit history help consumers attain lower interest rates, which can help them save thousands of dollars in paying interest over several years. But do they matter when you're applying for student loans? Here's what you need to know.
Do you need good credit to get a student loan?
Credit scores impact private student loans and people with lower credit scores can still receive lower interest rates by obtaining a cosigner, such as a parent, for their loans.
"For high-value loans such as mortgages, credit scores are an important part of the underwriting process," said Leslie Tayne, a Melville, N.Y. attorney specializing in debt relief. "Private student loans may require cosigners since there isn’t usually a credit history for the borrower. Along with credit reports, credit scores provide an overview of how financially responsible a borrower has been."
If you don't qualify for a federal student loan or would prefer going the private route, consider using a multi-lender site like Credible to shop around. With Credible, you can compare rates and lenders to find the best deal within minutes.
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BOOST YOUR CREDIT SCORE WITH THESE SIMPLE STEPS
Private student loans
Unlike federal student loans, lenders of private student loans require that students have good credit scores — at least 670 or above.
Some students do not have a good credit score because they don't have a long credit history and need a cosigner to get a lower interest rate. But cosigning can be risky for the co-signer if the borrower does not or is unable to make payments, said Amy Lins, senior director of enterprise learning at Money Management International, a Sugar Land, Texas-based non-profit debt counseling organization.
You can save cash by choosing the right private student loans — and online marketplace Credible can help. Plus, you can find lenders that allow you to add a cosigner.
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Private student loan applicants may find that their loan is subject to a high-interest rate because of a thin file or low credit score, Tayne said.
"Lenders are often reluctant to approve loans for those with poor credit histories, short credit histories, and charge higher interest rates because of the increased risk that the borrower will default on their loan without a steady income or right out of school," she said.
Having a cosigner with excellent credit provides the lender essentially with collateral if the borrower stops making payments.
"Since the risk involved for the lender is reduced significantly, they can offer a lower interest rate to the borrower," Tayne said.
Use Credible’s online student loan calculator to determine costs and future payments. You can also plug in some simple personal information into Credible's free online tools to see what rates you'd qualify for.
HOW TO FIND A COSIGNER FOR A LOAN
Federal student loans
Federal student loans do not require students to have a minimum or good credit score because the loans are backed by the federal government. Federal student loans also don't need cosigners. These loans are often preferred because they offer income-driven repayment plans and loan forgiveness options for students.
"Since most incoming undergraduate students are young and have little-to-no credit history because of their age, borrowers are only required to meet certain criteria for a federal student loan," Tayne said.
Students who have bad credit can still find options for student loans from private lenders or from federal student loans. You should be able to qualify for federal student loans at an affordable interest rate since your credit history is not a consideration.
"For those with poor credit, getting approved for student loans can be challenging," Tayne said. "Unfortunately, federal student loans have borrowing limits, leaving a gap for many borrowers with an adverse credit history. In this case, applying for private student loans with a cosigner with good credit, applying for scholarships, applying to school direct loans, or waiting a semester to save money and improve credit scores can all be viable options for borrowers to consider."
3 BENEFITS TO TAKING OUT A PRIVATE STUDENT LOAN WITH A COSIGNER
Bottom line
People who want to improve their credit score can do so by disputing erroneous accounts listed on credit reports, paying off high balances, and possibly increasing credit limits, or allowing time to pass if a thin file or late payments is causing a low score, Tayne said.
"Those new to credit will likely find it challenging to get approved for their first credit card," she said.
Check your credit score or detect identity fraud with Credible.
While federal student loan lenders do not examine your credit score to determine eligibility, private student loan lenders do check your score to see the likelihood of you paying back the debt. Avoid taking on too much credit card debt, pay your bills on time and talk to your parents about cosigning a private student loan.
Shop around since it might take some extra time to find the loan that's right for you. If you still need more money to pay tuition and other costs because you reached the limits of federal student loans, visit Credible to review private student loan options.
PRIVATE STUDENT LOAN RATES JUST DROPPED
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