Paying for College With Bad Credit

If you have no credit or bad credit, there are other financial aid options to consider before plunging into the world of long- term repayments.

Paying for a college education can be overwhelming, especially if you don’t have a good credit score. Whether you’re just embarking on your first foray with student loans or you’re familiar with the world of FAFSA, Pell Grants, and scholarship applications, there is probably more to the process than meets the eye. Not only are student loans the bulk of many peoples’ debts, they’re also the most likely to become delinquent over time. 

When you’re faced with the decision of whether to take out new student loans, there is a lot to consider, especially if you’re already dealing with less-than-perfect credit or other types of debt with high interest rates. Here are a few student loan options to review, especially if your credit is pushing sub par.

Federal loans

If you’re starting the student loan application process with bad credit, you might be better off getting a loan from the federal government. Loans with the U.S. Department of Education are federally regulated, which means the interest rates are capped and  likely to have lower rates than privately issued loans. Federal loans also come with fixed interest rates, so yours won’t increase during the time it takes to repay your loans.

According to Maurie Backman at The Motley Fool, federal student loans also “come with certain borrower protections that can make repaying them easier.” This may include applying for an income-driven repayment plan that lowers your monthly obligation to a more reasonable rate (depending on what you consider reasonable).

Certain payment deferment options may also be available to you if you are facing financial hardship due to unemployment or other circumstances. However, make sure to research the penalties for pushing off student loan payments, as certain types of payment postponement like forbearance (or even deferment on certain types of federal loans) still allow the loan to accrue interest during your payment hiatus.

Mark Kantrowitz, publisher and vice president of strategy for college planning consulting company Cappex.com, told OppLoans in a prior blog post that students should opt for federal loans first because they have better repayment terms, lower interest rates, and are generally more available than private loans.

Federal loans don’t always require a credit check, but certain types of loans — such as PLUS loans for graduate students or parents financing their child’s education — will require one. Read up on these, as you may still be able to get a loan, but you may need someone who does not have bad credit as a cosigner on your loan as a promise to take on the payment obligations if you default.

The federal loan application process can be confusing. Turn to OppU’s guide that discusses everything you need to know about the Free Application for Federal Student Aid.

Go private

Private loans may be an option for folks with bad credit. You might not get the best interest rate, but it is possible a private lender will approve you for a loan. Even though the interest rate difference between a private and federal loan might be just a few percentage points, throughout the life of the loan you may repay thousands of additional dollars in interest.

According to OppU’s financial aid guide:

A private student loan is another opportunity for students to receive financial assistance for college. Unlike federal student loans, private student loans can come from a variety of providers or individual lenders all with their own unique terms. These are generally more expensive than federal student loan options, but are still a solid option for students who need funding.

Sallie Mae is probably the most popular example of private student loans, as it’s the largest private student loan originator in the United States.”

One thing to consider: Without the flexible repayment options offered through the federal government as well as numerous forgiveness opportunities, you might end up stuck with that private loan in delinquency if anything goes amiss. 

Go for scholarships

Scholarship applications can be a time consuming process, but every dollar earned through scholarship is another dollar you don’t have to repay later. Your credit history or credit score should be moot when applying for scholarships, as you earn these instead of borrowing them.

Kantrowitz gave OppLoans a number of scholarship hunting tips and suggestions that you can start implementing right away to chip away at that student debt you may soon take on, especially if you have concerns about your creditworthiness, dealing with high-interest rates, and your ability to repay lenders: 

Start searching for scholarships immediately. There are scholarships you can win in younger grades, not just during your senior year in high school or after you are enrolled in college. The sooner you start searching, the fewer deadlines you’ll miss.

Search using a free scholarship matching service.  … If you have to pay money to get money, it’s probably a scam.

When using a free scholarship matching service, answer the optional questions in addition to the required question[s]. Students who answer the optional questions tend to match about twice as many scholarships on average as students who answer just the required questions. The optional questions trigger the inclusion of specific awards.

Apply to every scholarship for which you are eligible. Winning a scholarship is a matter of luck, not just skill, so the more applications you submit, the greater your chances are of winning a scholarship.

Also, remember that winning scholarships should only be part of the plan to pay for college, not the entire plan, as applicants aren’t guaranteed a win and scholarship amounts are typically much less than the cost of attendance. Even with a scholarship, it still may not be enough to cover your financial need.

Looking for scholarship money? The OppU Answers blog often posts about scholarship opportunities available for outgoing high school students or college students who are willing to put in the effort to apply. OppU also offers $2,500 scholarships to four different students each year who turn opportunities into solutions.  Check out the OppU Achievers Scholarship info here

Also, remember that you may have more financial aid options than you know. Be sure to review OppU’s resource, How Financial Aid Works:  A Complete Guide.

Your score will take a hit in repayment

Paying off the total amount of your loan should mean a higher credit score right? Not necessarily.

Every time you close a thread of debt repayment from a student loan, your score takes a minor hit. Not to worry; it isn’t permanent. The ding on your credit report is simply because you’ve cut out a piece of your credit history that is important to your score. It’s just like closing a credit card; losing available credit can potentially damage your score.

According to a previous post on student loan repayment, repayment damage “is especially true if you don’t have any other outstanding installment accounts. If you don’t have a personal loan, auto loan, or a mortgage, those student loans might have been the only installment account you had open. Plus, the odds are good that you do have a credit card — or five.”

Work for it

Employers paying their employees’ college costs or assisting is becoming more and more common. It’s possible that where you work right now could make a world of difference in your college debt repayment.

Starbucks is one such employer that offers 100% tuition reimbursement for a bachelor’s degree.  In cases like this, not only are you benefiting from your employment during school, you also get the opportunity to make back even more money. It’s a win-win if you can swing working while taking on the responsibilities of an undergraduate student.

Again, you may be eligible for a variety of options to help pay for college outside of standard loans and scholarships, from student work-study to federal benefits. It’s possible you may even have a 529 account you don’t know about. Regardless of the route you choose, be sure to do your research. The wrong decision could cost you years in unnecessary interest payments.

The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.