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Federal student loans can help cover education costs, but they may not solve all your financing challenges if you have poor or no credit.
Higher education has become increasingly expensive. According to the National Center for Education Statistics, the average annual cost (tuition, fees, room and board) for an undergraduate at a public university was $16,757 for the 2015–16 academic year, while at private nonprofit institutions this figure was just over $43,000.
You can pay for your education in several ways, including financial help from your parents, federal financial aid and federal student loans. But if those resources aren’t available or aren’t enough to cover all your costs, you may be thinking about a personal loan to help fund your education. If you find yourself in this situation, here are some things to know about available loan options for students, especially if you have no credit history or a poor credit history.
Loan options available for students
There are both federal and private loans available to help pay for college.
If you need a student loan to help pay for college, federal student loans can be a great option — especially if you have no credit history or poor credit. That’s because most federal student loans don’t require a credit check or a co-signer. In fact, repaying your federal student loan in full and on time can help you build credit.
To qualify for a federal student loan, you must meet certain eligibility requirements, such as being enrolled in an eligible degree or certificate program. You’ll need to complete the Free Application for Federal Student Aid, which the Federal Student Aid office (part of the U.S. Department of Education) uses to determine your eligibility for financial aid, such as loans, scholarships and grants.
If you are eligible for federal student loans, you may get a loan from one of the two main programs: the William D. Ford Federal Direct Loan Program or The Federal Perkins Loan Program. Here are a few of the available loans.
- Direct subsidized loans: Direct subsidized loans are based on an undergraduate student’s financial need. The federal government pays the interest while you’re in school, so you don’t begin to pay it until you leave school and your grace period ends or are enrolled less than half the time.
- Direct unsubsidized loans: Undergraduate and graduate students — regardless of financial need — may be eligible for direct unsubsidized loans. Your school will determine the loan amount for which you’re eligible based on your cost of attendance and other financial aid you’ve received. Unlike subsidized loans, you pay the interest on these loans even while you’re in school. If you choose not to pay the interest while you’re in school, the interest is added to your loan principal, or the total amount you originally borrowed.
- Perkins loan: The Perkins loan is available for undergraduate, graduate and professional students who have exceptional financial need. Unlike direct loans, with a Perkins loan your school is the lender — not the federal government. Not all schools participate in the program, so you should check with your college or university’s financial aid office. This loan also comes with a 5% interest rate, which may be lower than private loan options.
The federal government also offers Direct PLUS loans for graduate or professional students or eligible parents of dependent undergraduates. You can use these loans to pay for the cost of attendance that other financial aid didn’t cover. However, you (or your parent) must have good credit and meet other requirements in order to qualify.
Private and personal student loans
Federal loans may not cover all of your student expenses. Or you may not qualify for other forms of financial aid. If that happens, you might be thinking about a personal or private loan from a bank or private lender. Private and personal loans can have very different terms than federal student aid, so make sure you do your homework to find out if one of these options will work for you.
Private loans often come with higher interest rates than federal student loans. In many cases, rather than a fixed interest rate, the interest rate will be variable, meaning it can change over time. These loans also aren’t subsidized, meaning you’re fully responsible for paying all the interest. Most federal student loans also don’t require a credit check, whereas your credit history can affect your eligibility for a private loan and your loan terms, including the interest rate you pay.
“For many students, securing a loan for college will likely be their first time obtaining any type of debt,” says Xavier Epps, a Washington, D.C.–based financial adviser.
Personal loans are installment loans that can be used to pay for various consumer expenses, like debt consolidation or emergency costs. Some personal loans for students can be put toward education expenses.
These loans can come with fixed or variable interest rates, though the latter may be higher and increase the cost of your loan. As with private student loans, your credit history can help determine the loan terms and interest rate for your personal loan.
Epps cautions that you should consider personal loans to help fund your education only after you’ve exhausted all other options.
“Consider using a personal loan for smaller initiatives involving school but not the school’s tuition itself. Like books and other materials,” he says. “A personal loan should be the last resort to pay for school, as the amount needed to cover tuition is typically much higher than a bank would be willing to lend.”
Personal loans come in two forms: secured and unsecured.
- Secured loans: If you qualify for a secured loan, a lender will require you to put up collateral, such as personal property or savings. This gives the lender an opportunity to try and recoup its losses if you default, since your lender can then claim these assets if you’re unable to repay the loan.
- Unsecured loans: These don’t require you to put up collateral and are largely based on your credit history. But as a result, the interest rates on these loans can be higher, since your lender doesn’t have collateral as backup and is relying solely on your creditworthiness in determining your risk.
Pros and cons of personal loans for students
Since personal loans typically depend on your creditworthiness, having poor credit or no credit could affect your eligibility and interest rate. In these cases, you may need someone with a better or more-established credit history to co-sign the loan.
“Poor credit and the lack thereof could push a student to need help from a co-signer in order to secure financing of a personal loan,” Epps says. “Remember, personal loans are originated by banks and credit unions that can come with very tight credit guidelines, so you have to come with a decent credit profile to qualify.”
Another thing to keep in mind with personal loans and other private student loans is that unlike federal loans where your interest may be deductible, the interest may not be tax deductible. This means you may not be able to deduct the interest you pay for a personal loan from your taxable income on your federal income tax return.
We recommend considering federal student loans before you think about applying for a personal loan.
A college education is an investment, but that doesn’t mean you should put yourself in a financially tricky situation to pay for it. Luckily, there are several federal loan options for students, most of which don’t depend on your credit history to qualify.
If there are gaps in your financial aid, then you may decide to consider a private loan for students — and maybe even a personal loan, if you have no other choice. But before you agree to one of these loans, read the fine print to understand the loan terms, repayment options, whether the interest rate is fixed or variable, and what the loan will truly cost you once you’ve finished repaying it.
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Once you have all this information, you can make an informed decision about whether taking on this additional debt is worth it.