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Most loans -- including auto loans and mortgages -- are contingent on having excellent credit. If you have less than stellar credit, you'll either pay significantly elevated rates or you'll be denied outright. By contrast, for most federally funded student loans your credit score is irrelevant.
If you need to apply for either a PLUS (Parental Loans for Undergraduate Students) loan or private funding, however, your credit history and score can form a determining factor as to whether you qualify for a loan and the interest rate you must pay.
eHow asked Jodi Furman of the award-winning blog LiveFabuLESS.com (link below) to provide readers on qualifying for a student loan with less than stellar credit.
Furman has taught millions of readers a modern and doable way to live an upscale life without the price through her blog and TV appearances. She has an MBA from Columbia Business School and is a married mom with three young kids plus two dogs and two cats.
Fill Out the FAFSA
To apply for financial aid from the federal government, you must fill out a Free Application for Federal Student Aid -- or FAFSA. As the name implies, there is no fee for filing the FAFSA, but it is required by all states as well as many schools in order to qualify for aid. You may complete the application online at fafsa.ed.gov.
To fill out the application, you will need your Social Security number, Forms W-2 and federal tax return from the previous year, your parents' federal tax return if you're a dependent student, current bank statements and investment records, your driver's license number and -- if you are not a U.S. citizen -- your permanent resident card or alien registration.
Pay close attention to the deadlines, to be certain you are filing neither too early nor too late.
Receive Your Aid Packages
Federally funded Pell grants, Perkins loans and Stafford loans are offered based solely on your financial need. Your credit score will affect neither your ability to get funding nor the interest rate you will pay.
After you have filed your FAFSA, you will receive a Student Aid Report (SAR), an Expected Family Contribution (EFC) and financial aid packages from each school to which you have been accepted. Each school's aid package will show you the amount of aid for which you are eligible, which will help close the gap between the cost of school and your estimated family contribution. The aid can come as a combination of scholarships and grants -- which you do not have to pay back -- plus both subsidized and non-subsidized federal loans.
PLUS loans are technically federal student loans, although they are based in part on credit and therefore do not fit the conventional mold of most government student loans. An undergrad must have a parent apply for a PLUS loan, which is based solely on the parent's credit report. However, graduate and professional (law, medical, dental) students may qualify on their own for a PLUS loan. Eligibility is determined by the student's credit report. Qualifying for a PLUS loan is not dependent on income or assets.
PLUS loans are not technically dependent on credit scores, but rather on credit history. Applicants will not be approved if they have any adverse credit history, which is defined as being more than 90 days late on any debt, with an extension to no more than 180 days late for mortgage and medical bills, or having any Title IV debt within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment or write-off.
Once approved, unlike most other consumer loans, which are priced differently depending on credit score and history, PLUS loans offer the same terms and fixed rate (7.9 percent as of the date of publication) to all who qualify. These loans begin accruing interest once they're disbursed, and they include a disbursement fee of up to 4 percent. The first payment is due 60 days after the final disbursement. Payment may be deferred, however, "while the student on whose behalf the parent borrowed the loan is enrolled on at least a half-time basis, and for an additional six months after the student ceases to be enrolled at least half-time," according to the website "Start Here Go Further: Federal Student Aid."
The maximum value of a PLUS loan is equal to the cost of the student's attendance minus other financial aid the student receives. Should a parent-borrower, in the case of a dependent student, fail to qualify for a PLUS loan, the undergraduate student would then be eligible for additional unsubsidized Stafford loans, which have a lower fixed rate (6.8 percent as of the date of publication). Payment may be deferred while the
student is still in school.
Check Your Credit and Credit Scores
Once you've determined what federal aid is available to you, your next option is a private loan, which is where your credit score comes into play. An undergraduate student with little income or credit history will likely need a parent, other relative or friend to co-sign a private loan to get approved.
If you're independent of your parents, or a parent applying for your child, before you apply you should pull your own credit scores and credit reports. When you check your own credit score, it is considered a "soft inquiry," meaning it doesn't negatively affect your credit score. When a potential creditor checks your credit, however, it's considered a hard inquiry, which typically lowers your score. Checking your own credit also gives you an opportunity to identify and dispute any inaccuracies you may find in your credit report. Applying for loans without knowing whether you will qualify will take you further away from your goal of qualifying for a loan and may increase the interest rate that you will pay for the life of the loan.
There is no free way to receive your actual credit score. All those "free credit score" ads you see only provide estimates, also called "educational scores."
You have three different credit scores -- and credit reports -- as there are three different credit bureaus: TransUnion, Experian and Equifax. It is normal for your scores to differ from one bureau to the next. This happens because they may each have different information. Each uses proprietary scoring models. You may check all three of your credit scores for $40 at experian.com.
You can check your educational scores for free at creditsesame.com and creditkarma.com. While, these are only estimates, not real scores, they are still worthwhile as they'll provide free advice that will help you improve your score.
You can get a free copy of your credit report from each of the three credit bureaus once every 12 months or after you've been declined credit. Credit reports contain all of the information that is used to compute -- but do not contain -- your credit score. Get a copy from each credit bureau at annualcreditreport.com.
Improving Your Credit Score
Review all the sections on each of your three credit reports. Should there be any inaccuracies on any of your reports, you should dispute the information. The credit bureau must respond within 30 to 45 days. If they agree that the information is inaccurate, or should they fail to respond, the information will be removed. You can also add a short (100 words or less) statement to your credit report where you can explain any issues that may have contributed to your credit history.
One possible quick fix is to ask a more creditworthy friend or family member to add you as an authorized user on their oldest credit card. This does not mean someone has to give you access to his actual card. You just need someone to add you as an authorized user to the account. Doing so can accomplish two things: It can "lend" you their better history and score, as well as increase the average age of your accounts. You can also take out a very small personal loan from a bank and pay it back in full, demonstrating your creditworthiness. Do not close out accounts, even ones that you don't use, as closing accounts will lower your credit score.
Whether or not you're approved, as well as the rate you pay for private loans, is dependent on your credit score and your income. In general, scores below 620 to 630 will prevent you from securing a private loan. Once you've checked your credit scores, you should have a good sense of whether or not you will qualify.
Unlike federal loans, private loans are available from numerous providers. So even if you are declined by one or more providers, you have more options. In addition to higher rates, borrowers with lower credit scores might be also subject to lower loan limits. Further, the lender may limit the spending of funds to only legitimate school charges.
To qualify for a better rate -- or to qualify at all, should credit scores prevent the student from securing a loan -- ask a friend or family member with better credit whether they'd be willing to co-sign your private loan. However, this means the co-signer of the loan will be "on the hook" you fail to pay.
Another option to secure a better interest rate is to make regular payments or interest-only payments while still in school.
Many lenders offer an appeals process and may make an exception should there be extenuating circumstances or errors on your report.