The numbers can be daunting if you’re trying to pay your way through college. According to The College Board’s report on the 015-16 school year, public, four-year, out-of-state schools set students back an average of about $34,000 for tuition, fees, and room and board. Private schools can cost almost $44,000.
Few students have that kind of cash available, so they take out loans to finance their educations. But they also haven’t achieved their full earning potential yet and may have spotty or nonexistent credit histories. There are some alternative loans for students with bad credit, but the federal government may be your best option.
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Federal Student Loans
The U.S. government doesn’t care about your credit score. In fact, it won’t look at your score when you apply for a student loan at all. Even if your credit is bad, you won’t need a cosigner. Federal student loans are based on need, so the less income you have, the more likely it is that you'll qualify.
Another plus of federal loans is that they generally offer low interest rates — sometimes significantly lower than private loans. Look for those that are subsidized — this means the government will pay the interest on your behalf while you’re still in school. A potential drawback is that federal student loans won’t always cover the entire cost of your education.
You can find out if you’re eligible — and the type of federal loan you’re eligible for — by completing the Free Application for Federal Student Aid or FAFSA online at www.fafsa.ed.gov.
Private Loans for Students
Private loans for students with bad credit are rare. A student loan is no different from any other loan in the eyes of a bank or other lending institution — the lender wants some assurance that you can and will pay the loan back. The odds of this decrease as your credit score sinks. Unlike the federal government, private lenders will check your credit score and will most likely charge significant interest if they approve you at all.
Consider a Cosigner
So what is a student with poor credit supposed to do if federal loans don’t cover the full cost of his education or if he doesn’t qualify for one? Most private lenders will overlook a bad credit score if you have a cosigner with very good credit — maybe your parent, another relative or a friend. This tells the lender that if you cannot pay off your loan, your cosigner can and will.
Another less common alternative is peer-to-peer lending. This is pretty much what it sounds like — some altruistic soul wants to help you get through college even though the odds are stacked against you financially. It might sound like an ideal solution, but there are both pros and cons to such an arrangement. On the positive side, you may be able to negotiate better loan terms than you would with a private lending institution, even with a cosigner. But Debt.org cautions that these lenders often like to remain anonymous. They may be willing today but change their minds tomorrow. Peer-to-peer lending is risky, but if it’s your only option, scout around online for a website that will link you to someone who is willing to help.