Most loan processes begin with the applicant's credit score, which measures the applicant's likelihood of paying back the loan in a timely manner. Higher credit scores often mean lower interest rates and access to more loans, while lower credit scores can severely limit a borrower's access to credit. In the world of student loans, however, credit scores can be less crucial to whether an applicant receives student loans.
The good news is that eligibility for federal student loans doesn't depend on an applicant's credit score. Stafford, Perkins, and PLUS loans do not take applicants' credit scores into account and do not require a cosigner or separate loan application. Instead, the loans are intended to help make higher education affordable and are offered at a fixed rate for graduate and undergraduate students regardless of their financial need.
However, the federal government does look at some of the applicant's financial information, including his handling of any other federal student loans and credit history. Applicants must not have defaulted on any current federal student loans or have an adverse credit history. That means the applicant must not have been more than 90 days late on payment for any debt or have had any Title IV debt that was associated with bankruptcy discharge, foreclosure, repossession, default determination, tax lien, write off or wage garnishing.
The trade off for easy-to-get student loans is that the borrower has them until they are paid off, even if it takes decades. Except for very rare cases, these loans cannot be dispelled through bankruptcy.
Private loans, on the other hand, are subject to credit scores. Lenders, not the federal government, set the terms of the loans, and underage applicants likely will need a cosigner with good credit who becomes equally obligated to repay the loan.
While financial institutions may advertise low interest rates for private student loans, those low rates may only be available to applicants with near-perfect credit scores. A cosigner with a high credit score could provide a boost, as some lenders will use the higher credit score between the applicant and the cosigner in processing the loan and determining the interest rate and fees.
A borrower's credit score also will come into play if she refinances the loan. Lenders typically will determine the interest rate on the new loan based on the borrower's current credit score.
Remember, once you secure a student loan, it can still affect your credit score. On the downside, not making monthly payments or defaulting on a student loan can destroy a student's credit score and make it difficult to get additional student loans for further schooling. A poor credit score also can impede a young adult's start on life, as some employers even check an applicant's credit score before making a job offer.
When managed well, however, including making all monthly payments in full and on time, a student loan can boost a borrower's credit score and make it easier to secure a first auto loan, rent a first apartment, or get a first unsecured loan.