Check out these 8 tips for borrowing student loans with bad credit history.
While I’m not a huge fan of private student loans, a lot of people want to go to colleges that are more expensive than federal loans will cover. Ultimately, it’s up to you to make the best decision in your own circumstances.
1. Borrow federal first
You should almost always borrow federal student loans first.
Most federal loans provide you with better benefits than any private loan, such as:
The federal Direct Loan program offers U.S. citizens and permanent residents excellent loan terms with low eligibility requirements.
Federal loans tend to offer better interest rates.
Federal loans don’t require a credit check.
Federal loans are eligible for income-driven repayment plans (IDR). If you don’t make a lot, your payment could be $0/month with an IDR plan.
The federal government pays the interest on your Direct Subsidized Loans while you are enrolled at least half-time.
Federal loans are eligible for multiple forgiveness programs, such as Public Service Loan Forgiveness and IDR forgiveness. And remember, several U.S. Democrats hope to forgive a meaningful amount of borrowers’ federal student debt.
If federal student loans don’t cover the overall cost of attendance, seek out well-reviewed, low-interest private student loans. Or consider another path besides college.
Note: Graduate and professional students have higher loan limits than undergrad students. Grad students may be able to cover 100% of their cost of attendance with federal loans.
2. Don’t borrow more than you can afford to repay
Estimate how much you’ll be making in your chosen career. Budget how much you’ll be able to pay towards student loans each month after you graduate.
Don’t blindly borrow more than you can afford to repay. Avoid over-borrowing from private loan companies, which offer very little in the way of income-driven repayment options or any forgiveness options.
For context, the average American has just under $40,000 in student debt. 11% of those borrowers default in the first 12 months when their first loan payments become due.
3. Beware of high interest rates for subprime loans
Loans disbursed to borrowers with credit scores below 600-620 are considered “subprime loans.” Subprime student loans typically boast higher interest rates. The higher the interest rate, the more you pay over the life of the loan.
In my experience, subprime student loan lenders tend to be more aggressive in their collection tactics.
Check out my tips below on how to raise your credit score.
4. Ask a friend or family member with good credit to cosign
Many first-time undergraduate students must ask a family member to cosign private student loans with them. Private loan lenders want somebody with good credit on the hook if the primary borrower defaults (fails to pay).
If you plan on responsibly repaying your student debt, ask a family member to cosign your private student loan. A cosigner with good creditworthiness will likely lower your interest rate.
Read More: Can a Cosigner Sue the Primary Borrower on a Student Loan?
5. If you have to borrow private loans, read ALL of the fine print
As private lenders compete for business, private have become more generous with their terms, benefits, and interest rates.
However, private loan companies can still offer terrible loan terms, and you might not even know it when you sign. Read all the fine print of a private loan agreement or contract. Don’t become another student loan horror story because of unexpected legal details.
Hidden fees can increase the cost of a private loan. Avoid origination fees, and enroll in autopay since most advertised rates are actually the lower interest rates with the automatic payment discount already applied.
6. Look for a fixed interest rate
Variable APR interest rates are unpredictable and usually lead to higher actual loan rates.
Opt for a fixed APR interest rate for 2 reasons:
Fixed rates usually mean less money spent by the end of your loan term.
Fixed rates allow you to budget more consistently.
7. Research grants and scholarships instead of loans
Grants and scholarships do not have to be repaid, but loans do.
Scholarships should always be your first line of funding for school. You can qualify for scholarships based on test scores, where you live, your ethnic/racial background, religion, etc. Your college or an outside entity, such as a nonprofit, may provide scholarships relevant to you.
Grants require specific criteria to be met, in which case you don’t have to pay a grant back. However, if you fail to meet the terms, you may suddenly have to repay the grant money.
8. Consider waiting to go to school or choosing a less expensive college
If you have poor credit and can’t secure enough private student aid to pay for college, consider not attending college or finding a cheaper school. Several options for career growth don’t require you to live your whole life with insurmountable debt.
Employers often value experience more than a degree in today’s corporate climate. If you can’t afford college, seek out internships, apprenticeships, gigs, and networking opportunities.