How to Clean Up Bad Credit if Your Student Needs Student Loans
Are you struggling to get loans for things you need because your credit report has problems?
You’re not alone.
Some parents are still struggling with their own student loan debt and bad credit from other unfortunate life events, and now their children are ready for college themselves.
Others have multiple children in school and have a debt-to-income ratio that is preventing them from getting needed credit.
Regardless of your situation, there are steps you can take to clean up your credit report.
But remember, fixing your credit takes time and it will require you to manage it responsible for a while.
If you start early, you’ll be able to improve your credit, which will allow you to borrow if you need to help your children pay for college
How to Successfully Repair Bad Credit
Make sure there aren’t errors in your credit score
The first step to cleaning up your credit report is checking for errors and getting them corrected.
The Fair Credit Reporting Act allows you to request a free credit report every 12 months from each of the three major credit agencies.
You also have the right to dispute inaccurate or incomplete information, and the credit reporting agencies must make the corrections within 30 days.
Common credit report errors include:
- Debts applied to your account that should be someone else’s, often due to a similar name or a clerical error
- Mistakes regarding your identity, such as name, address, and phone number
- Closed accounts still showing as open
- Accounts inaccurately reported late or delinquent
- Incorrect information regarding date of most recent payment or date the account was opened
- Errors in account balance or credit limit information
Don’t be shy about getting these mistakes corrected.
You can file disputes online with each agency.
Also keep an eye on your credit reports over time to spot any evidence of identity theft or other problems early, while they are easier to correct.
Improve your payment history
These suggestions are part of basic financial management – pay on time and don’t miss payments.
Making improvements in these two areas can have the biggest and fastest positive impact to your credit, compared to anything else you can do.
The longer you pay your bills on time after being late, the more your credit score should increase.
The impact of past credit problems on your credit score fades as time passes and as more recent good payment history appears on your credit report.
Pay off as much debt as possible
If the credit problems you’re having are related to high credit balances, high debt-to-income ratios, or other credit problems, do what you can to make a difference.
Making payments on time is one of the biggest factors, accounting for 35% of your credit score.
It also helps to make more than the minimum payment if at all possible.
Of course, paying back student loans can make a big difference.
If you’re still dealing with your own student debt, see what you can do to get it up to date and even paid off.
You may be able to make a lump-sum payment to get it covered.
If that’s not possible, consider student loan forgiveness options.
There are a variety of forgiveness programs available for those who work in public service, teaching, nursing, or a non-profit.
There are also loan repayment assistance programs that can help.
Income-based repayment may be an option as well.
Contact your lender to see if alternate arrangements can be made to make your debt easier to handle.
Borrowing and Bad Credit
Be cautious about future borrowing
Of course, you don’t want to clean up your credit report only to tank it again with large amounts of debt. Be very judicious about future borrowing, including cosigning on private student loans. Those show up on your credit report just as if you took out the debt yourself.
It’s very hard to get private student loans with bad credit or a messy report. Cleaning up your credit records can help you access the funds your student needs. But if you’re not careful, you can end up right back where you started.
One mistake parents sometimes make is not considering the full four years of college...having a one-year view.
Sure, the amount you’re borrowing to finance the freshman year may not look like much, but what about the next three?
And if you have other kids, they’ll expect the same help.
Set expectations carefully, and look for other ways to keep costs down as well.
Make sure your student borrows federal loans first
Whatever the state of your credit, your student should always make use of federal student loans as their first step in borrowing for college.
Federal student loans can often be obtained by students with bad credit, as they do not require a credit check or rely on a student or parent’s credit history.
Students can receive subsidized or unsubsidized Direct Loans to meet educational expenses, with different loans available depending on financial need.
Federal Direct loans, for students, will offer the lowest rates available, as compared to private student loans.
If needed, students should borrow the maximum they can in federal loans before turning to private loans or having their parents apply for Parent PLUS loans.
As for loans that parents can borrow from the government, the Federal Parent PLUS loan involves a modest credit check, which looks for the absence of an adverse credit history.
Eligibility for the Federal PLUS Loan does not depend on a parent’s credit scores or debt-to-income ratios.
What Is Considered Bad Credit History?
An adverse credit history occurs when
- the borrower has a current delinquency of 90 or more days on more than $2,085 in total debt; or
- the borrower has more than $2,085 in total debt in collections or charged-off during the two years preceding the date of the credit report; or
- the borrower’s credit report has a derogatory event within the five years preceding the date of the credit report.
Derogatory events include:
- Default determination
- Bankruptcy discharge
- Foreclosure (including a deed in lieu of foreclosure)
- Repossession (including voluntary surrender to avoid repossession)
- Tax lien (including county, state and federal tax liens)
- Wage garnishment
- Charge-off or write-off of a Title IV Federal debt (including a debt from a federal grant overpayment, not just federal student loans and federal parent loans)
Any questions regarding the parent plus process or adverse credit issues, call The Department of Education at 800-557-7394.
As a good option for all students, parents can help their children build a credit history, which will be beneficial for those who need to apply for private student loans.
Check out suggestions from other parents about best practices for helping your student build credit.
Reduce Costs for College Before You Borrow
Many families don’t realize that which colleges you apply to can make a big difference in the amount of need aid and merit scholarships colleges offer, which in turn impacts a family’s net cost.
Not only are colleges more or less expensive, but some schools are much more generous with financial aid as well.
Knowing which schools are the best with aid can make a big difference in your student’s overall debt and the financial burden on your family.
Learn more about our essential tools for developing a list of schools with merit scholarships here.
There are a variety of other cost-cutting measures. Even the smallest steps can make a big difference.
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