When I got into graduate school, my parents were thrilled. However, our excitement was dampened when we got our bill for the upcoming semester; I hadn’t qualified for any scholarships or grants, so I’d have to turn to student loans to pay for school.
However, my credit history was nonexistent and I was only working part time. I started to think that I would have to cancel or postpone pursuing my master’s degree.
Thankfully, my mom is a top-notch researcher and helped me find the best student loans for me, even with no credit history. Most private lenders wouldn’t issue me a loan, but I did get enough money from federal loans to cover my costs.
It took a bit more homework to understand my options and federal loan eligibility requirements, but I was relieved my credit history didn’t hold me back from an education.
If you’re a parent and your child has no credit or poor credit, don’t get frustrated. As I found out, there are many options available to help them pay for school.
Best student loans for borrowers with poor credit
When you think about how your kids will pay for school, it’s important to know that there are two main types of student loans: federal and private. Federal student loans are issued directly from the government, while private student loans come from financial institutions such as banks.
Both types of loans can be useful tools to pay for college, but you might be limited in what kinds of loans your child is eligible to receive.
Federal student loans
Federal loans should be where you start. If your son or daughter has bad credit, federal student loans are the closest thing to guaranteed-approval loans.
Federal student loans tend to have lower interest rates and more generous repayment terms than private loans.
Best of all, the government doesn’t consider their credit history when evaluating their application for most federal loans.
These are the two no-credit-check student loans offered by the government:
- Direct Subsidized Loans: If your child is an undergraduate student and can show financial need, they might qualify for Direct Subsidized Loans. These loans are one of the best options available because the government covers the cost of their interest charges while they’re in school, for six months after they graduate, and if they postpone their payments through deferment.
- Direct Unsubsidized Loans: Direct Unsubsidized Loans are not based on financial need. The government doesn’t cover accrued interest on unsubsidized loans, so they can be more expensive overall than subsidized loans. However, they’re still a good option because of their relatively low interest rate — 4.45% as of January 2017 — and federal loan benefits.
Direct Loans are the best student loans available to your child if they have poor credit. To get the funding they need, they must complete the Free Application for Federal Student Aid (FAFSA). The FAFSA is a critical form the government and your child’s school uses to determine what aid they receive, including grants and student loans.
If your child needs help completing the FAFSA online, check out this comprehensive guide that can assist them through the process.
Private student loans
Although private loans can help your child pay for school, they tend to be more expensive than federal loans and don’t offer the same benefits. According to The Institute of College Access and Success, private loan interest rates can be as high as 13.74%.
To put that into perspective, if your child took out a Direct Unsubsidized Loan for $10,000 at 4.45% and repaid it over 10 years, they’d pay back a total of $12,408. But, if they took out a private loan at 13.74% and paid the loan back over 10 years, they’d pay $18,445. The increased interest rate would cost them over $6,000.
|Direct Unsubsidized Loan||Private Student Loan|
|Repayment Term||10 years||10 years|
|Total Interest Charges||$2,408||$8,445|
Although federal loans are the best student loans for those with poor credit, the government does limit how much students can borrow. It may even approve them for a smaller amount than they need to fully pay for school.
If your child exhausted all of their federal loan options and still doesn’t have enough to pay for school, pricier private student loans might be what they need to fill the gap.
However, many lenders have stringent requirements for applicants that include high credit scores. Private no-credit-check student loans aren’t available from most reputable lenders. That means applying for a private loan when you have bad credit can be especially difficult.
One lender that might be a smart option is LendKey. Unlike other lenders, LendKey works with a network of banks and credit unions to offer private student loans. That means when your child submits an application through their website, they’re actually applying to several lenders at once — with just one credit check — increasing their chances of getting a loan.
LendKey doesn’t list the minimum credit score on their website, but because they work with credit unions, your child might be more likely to get a loan with LendKey. Credit unions tend to have more forgiving eligibility criteria than other financial institutions and offer competitive interest rates.
Other private loan options
If your child wants to shop around to compare loan interest rates, there’s another way to get approved.
If your child has poor credit, most lenders will be willing to work with them if they have a qualifying cosigner. A cosigner, usually a parent or relative, is someone with a good income and strong credit history who serves as a guarantee that the loan will be repaid. If you child falls behind on the payments, the cosigner is responsible for making them instead.
Acting as a cosigner can help your child get a loan and receive a lower interest rate than they would receive on their own. In fact, some lenders offer interest rates as low as 3.00% for qualified borrowers. However, becoming a cosigner is a big decision, so make sure you both understand what cosigning entails.
Improving credit history
If you know your child is going to need help paying for school, start researching their federal and private loan options now. They might need more loans to pay for college than the federal government will issue, so improving their credit score is essential to receive the best student loans at a reasonable interest rate.
To get started, share our guide to increasing your credit score with your child.
Need a student loan?Here are our top student loan lenders of 2018!
1 = Citizens Disclaimer.
2 = CollegeAve Autopay Disclaimer: All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
3 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
|4.12% – 11.85%*3||Undergraduate and Graduate||Visit SallieMae|
|3.69% – 12.07%2||Undergraduate, Graduate, and Parents||Visit CollegeAve|
|4.07% – 12.19%1||Undergraduate, Graduate, and Parents||Visit Citizens|
|3.83% – 12.11%||Undergraduate and Graduate||Visit Ascent|
|4.63% – 9.71%||Undergraduate and Graduate||Visit LendKey|
|3.62% – 9.79%||Undergraduate, Graduate, and Parents||Visit CommonBond|