If your student is looking into private student loans, you may wonder how his or her credit rating will affect the options. The truth is, as a high school or college student it can be very hard to get private student loans with bad credit

Unfortunately, having no credit is very similar to having bad credit. As a result, a 17-year-old who has never had a credit card may struggle to get private student loans as well.

However, your student does have options. Here are some ways credit affects private student loans, and what your student can do about it.

Banks Are Much More Conservative

Since the economic debacle of 2008—2010, banks have become a lot more conservative in their lending. As a result, they are much more careful about how much money they offer and who they are willing to work with.

When a bank lends money, there’s always a risk that the borrower will not repay. The bank accounts for this risk in two ways—by charging appropriate interest and fees, and by choosing to loan only to the most creditworthy borrowers.

If a student is looking for private student loans with no credit or bad credit, they are likely to be denied or charged very high interest and fees.

Start with Federal Student Loans

Federal student loans do not take credit into account, so they should be the starting point for any college-bound student. Federal student loans still have fees and an interest rate, but the fees are often lower than private loans. In addition, the interest rate is fixed for the life of the loan, which makes it simple and predictable.

Federal student loans have other important benefits, including income-based repayment options, forbearance and deferment possibilities, and even student loan forgiveness opportunities.

Keep in mind there are two types of Federal Stafford Loans. Subsidized loans do not accrue interest while the student is in school or during the repayment grace period.

Unsubsidized loans do accrue interest. Your student can either pay interest payments during school, or defer the interest and add it to the overall loan to be repaid after graduation.

Looking for Private Student Loans with Bad or No Credit

Unfortunately, we are in a time when college is often more expensive than Federal Stafford Loans will cover. That’s why so many students are looking for private student loans.

Cosigners for Private Student Loans

One way to get private student loans with bad or no credit is to seek out a cosigner. If your student can find someone with excellent credit who is willing to cosign the loan, they can often find approval while also saving a lot of money in interest and fees.

Of course, there is risk to the cosigner. The debt will show up on their credit report and may impact the ability to get other loans. If the student can’t make even one payment, the cosigner is immediately on the hook.

If your student is considering a cosigner, be sure to seek out a private loan that has a cosigner release option. This allows the cosigner to be removed from the loan after a certain number of on-time payments. This provision helps the cosigner avoid being affected by the debt for a decade or more.

Higher Student Loan Interest and Fees

If no cosigner is available, or your family decides it’s not a good option, your student will likely pay for the risk of the loan in fees and interest. If you choose this direction, it’s vital to compare the loan offers you receive.

We have a student loan cost calculator that can help tremendously. If you know the fees, interest rate, and duration of the loans, you can compare them side by side. It will help you visualize the actual lifetime cost of each loan, so you can choose the one that’s best for your family.

Consider Building a Credit History

Another option is to consider putting college off for a few years while your student works to save up money and build a credit history.

While this may make you nervous, remember that most students are not working in the area of their major anyway. This happens because they didn’t know what they wanted, or didn’t know what degree would be best.

If your student starts working, they will get a feel for what they enjoy and what they don’t. They’ll have a much better idea what education will help them reach their goals. In fact, they may find a four-year degree isn’t needed at all. A two-year degree may qualify them to work in their desired field.

Delaying school can be a win-win-win for many students. They can build a credit history, save up money from working, and discover more about life and what they’d like to do for work.

Advice From Parents on How They Helped Their Students Build Credit

In a recent discussion on our Paying For College 101 Facebook group, parents shared the steps they took to help build their high school student’s credit:

• “We added our daughter to a credit card, got her a bank account with debit card and a gas card. Her credit will allow her to hopefully secure loans in her name rather than parent plus. She is very responsible, but I keep a constant eye on her spending. I think u have to judge ur own child’s readiness, but keep an eye on them”
• “We did the same thing when our son was 15 – opened regular checking account with debit card. We also added him to a credit card but he can only use it with permission and he has never abused the privilege.”
• “Adding the child as an authorized user on the parent’s credit card doesn’t establish a credit history for the child; HOWEVER, it does give them a credit score! My 16-year-old daughter’s credit score was stellar when I shopped around for auto insurance adding a teen driver and second vehicle – her credit score gave me an additional discount so, while unexpected, it turned out well!”
• “My daughter has had a credit card in her name as an authorized user on my credit card since she was 8 and started going on out-of-state school trips. She was never very good at keeping track of cash money and has seen me pay off credit card balances in full each month. Of course, if she had ever given me a reason to distrust her, I’d have had to regroup and make different decisions, but that has never happened – she’s almost 20 now.Having a credit card in her name has been so beneficial in various circumstances over the years. The most recent was when she was traveling alone at age 17, but needed to check into a hotel in a city unknown to either of us states away from home after her connecting flight was canceled. The airline gave her a voucher to cover the cost, but the hotel asked for a credit card to have on file to cover the mini-bar and/or damages. I think if she had only had a credit card in my name, they would have looked at her birthdate closer and declined to let her stay. Technically, everything she signed was unenforceable as a minor, but there were no issues.”
• “Authorized user with their own name on the card does build a credit score of their own. Other benefits is they do not need a co-signer/deposit on utilities, etc.. with an off-campus apt.”
• “The best and safest option for building your child’s own credit history and teaching them fiscal responsibility is to open a checking and savings account in their name when your local bank will allow it at their age with you being the joint owner. Once the child has put $500 of their own money into the savings account, inquire with the bank about getting them a secured visa. They will use the $500 in the saving account to secure the card and it sets the limit on the card to $500. Have them then setup a reoccurring charge like a Netflix account or something very low amount $10 to $20, and then ensure every month when the charge comes due, they pay the card off in full. If they want to use the card for more that month, just make them understand that when the bill comes due, they have to pay it off in full, whether that’s $10 or $250. It’s worked for both my kids and my daughter managed to secure a $9,000 auto loan in her own name without a co-signer at 19 on a part time job.”
• “Part of me helping them be fiscally responsible was reviewing their bank account and spending habit with them with me being joint owner, I had access to their online bank account to be able to see all transactions coming and going. The secured visa I could not with my bank, only my child could see that in their app. They each worked part time jobs and so they had full access to their debit card. Their secured visa was with me and we discussed if they wanted to use it for any reason. It was rare they ever used it, they used their debit card for everything they wanted/needed. The secured visa with a reoccurring monthly charge with pay off in full was just to build credit history.”
• “You really need to check w the specific credit card company/bank to see what info if any is reported. Some cards report everything to everyone on the card other do not report anything for an au. For a variety of reasons my daughter is on a few cards, they are all reported differently on her credit report. One does show the open credit, one doesn’t even show up. Also remember that kids and young adults are often the victim of ID theft because their socials are often ideal for a long time. Before adding or trying to get a cc run their report and make sure it’s clean.”

Getting private student loans with bad or no credit is very challenging. However, it’s not impossible, you and your student just need to be realistic about the options. Or start building up your student’s credit score and history, with suggestions from other parents who have already done that for their children.

To help parents and students make informed decisions about student loan costs, we developed the Road2College Student Loan Comparison Spreadsheet, which you can download for free. 

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