The credit score needed for a student loan is important to understand. If you’re going to apply for a private student loan or Direct PLUS Loan or want to refinance your student loans to a lower interest rate, your credit score will be a determining factor.
Credit score basics
A credit score is a summary of your credit history. It tells the lender how likely you are to pay your debt. According to USA.gov, your credit score is determined by:
- Payment history
- Outstanding balances
- Length of credit history
- Applications for new credit accounts
- Types of credit accounts (mortgages, car loans, credit cards, etc.)
All of this information appears on your credit report. This information is run through a calculation to give you a number, which is your credit score.
The credit score you have determines the fixed and variable rates you’re offered by private lenders. The better your score, the easier it can be to get a student loan.
There are several major credit bureaus (e.g. Transunion, Experian and Equifax) that each have their own formula for determining your credit score.
Originally created by the Fair Isaac Corporation (FICO), the FICO score is a common type of credit score used by many lenders. This score has a range from 300 to 850. Generally, a score above 670 is considered good. This doesn’t mean that number will get you the best student loan rates, though.
The credit score needed to get a student loan
Your credit score can be the ticket to the best student loan interest rate and terms.
Private loans can be found at your local bank or credit union, as well as online lenders like Earnest and Ascent. Private student loan lenders have a credit score minimum in order to qualify. You can typically find this on their websites under eligibility criteria. This minimum is the lowest score they’ll accept.
Most lenders only advertise their lowest rates on their websites. According to FinAid, borrowers with bad credit can see interest rates up to 6% higher and loan fees up to 9% higher than what’s advertised as the best rate. Borrowers with the minimum credit score can also see the loan limits drop by about two-thirds less than expected.
While a 670 score is good, this only means you may be approved for a student loan. You want the lowest interest rate and a higher loan limit. Travis Hornsby, founder of Student Loan Planner®, says that a credit score of 700 or better will get you your best options from lenders. But not all lenders are the same, and your offers will vary.
Refinancing private student loans after rebuilding your credit
If you don’t have a long credit history, that doesn’t mean you’re out of options. When you first apply for a private student loan, you may end up with a higher interest rate. This is because you’re seen as a risk.
You can choose to accept a loan now. Then after you graduate and increase your future income, you can look into refinancing your loan for a better rate. With student loan refinancing, you’ll essentially be applying for a new private student loan.
Shopping for student loans doesn’t hurt your credit
It’s essential to shop around when looking for a private student loan or refinancing your student loans. You want to review loan terms from multiple lenders to find the best rate.
You can complete preapproval applications and get loan quotes without this hurting your credit score. FICO states that, “In general, student loan shopping inquiries made during a focused time period (for example 30 days) will have little to no impact on your score.”
A preapproval isn’t an official loan offer. It’s only an estimate based on the information you provided. This gives you, the borrower, power over your decision of which private student loan is right for you.
Federal Direct PLUS Loans
PLUS Loans require an additional application after you’ve completed your Free Application for Federal Student Aid (FAFSA). This is because the U.S. Department of Education performs a credit check. It doesn’t look at your credit score as much as it does your history. If you have adverse credit history, you won’t immediately qualify for a student loan.
The Department of Education considers adverse credit history to be any of the following:
- You have one or more debts with an outstanding balance greater than $2,085 that are 90 or more days delinquent as of the date of the credit check.
- You have debts that have been placed in collection or charged off (written off) during the two years preceding the date of the credit check.
- In the last five years, you’ve been subject to default determination, discharge of debts in bankruptcy, foreclosure, repossession, tax lien, wage garnishment, or write-off of a federal student aid debt.
If you have adverse credit history, you can try to get an endorser (similar to a cosigner). Or you can submit documentation if you had extenuating circumstances for your adverse credit history. This may qualify you for a PLUS Loan.
PLUS Loans have a higher interest rate than other federal student loans. If you can afford the student loan payments now, it’s a good idea to look into private student loans and compare them to PLUS Loans. Often you can find a better rate with a private student loan if you have a good credit score.
What if you don’t have a strong credit score?
If you don’t have the credit score you need for a private student loan, you have a few options.
First, you can look at the minimum credit score requirement and income required by the lender. If you don’t meet the minimum or want to get a better rate, you can find a cosigner. This can make all the difference in the loan terms and interest rates you’re offered, as you’re using the cosigner’s credit score to help lessen the risk the lender has to take with you.
A cosigner agrees to repay the loan if you don’t. Any late or missed monthly payments by you will affect their credit history. They’re 100% financially responsible for the loan, so this decision shouldn’t be taken lightly by either party.
Occasionally, private student loan lenders will offer cosigner release policies that you can look into once your credit score has improved. You can also try to refinance the student loan in your name only.
Before you find a cosigner — or even take on a private student loan at all — you should make sure you’ve taken advantage of federal student loans.
Always go for federal student loan options first
In most cases, federal student loans are preferable to private student loans. You should opt to take out any Direct Subsidized and Unsubsidized student loans you’re offered before considering a loan that requires a credit check.
Federal loans offer more borrower protections and repayment plans. They’re also eligible for student loan forgiveness programs, making them the better choice for most borrowers. Only if you can’t fund your entire education with federal student loans should you consider private or PLUS loans.
But even if you never apply for a private student loan, always check your credit scores for the sake of your financial health.
Paying for college can be challenging. The team at Student Loan Planner® understands this and wants to help. If you want private, one-on-one consultation to get in front of your student loan debt, then reach out to us today.
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2Earnest: All rates listed above represent APR range. Rate range above includes optional 0.25% Auto Pay discount. Earnest disclosures.