For many loans, including mortgages and credit cards, you at least need a credit history to prove to the lender that you are a reliable borrower. So, if you just graduated high school and are looking into borrowing student loans, you may be wondering if it’s possible to borrow one without credit history.
It is possible to borrow a student loan with no credit history. Federal student loans (outside of PLUS Loans) do not require a credit check. Private lenders do review an applicant’s credit history during the application process, among other personal financial factors. Potential borrowers who do not have a strong credit history may be able to add a cosigner to strengthen their application, but there are no guarantees.
Related: Should I refinance my federal student loans?
Federal vs. private student loans
First things first: there are various types of student loans available to student borrowers. They fall into two general categories: federal (offered by the government) and private (offered by banks and other lenders). But there are more options under each umbrella that range from differing eligibility requirements to fixed vs. variable interest rates.
Types of federal student loans
Federal student loans are funded by the U.S. Department of Education and are based on education costs and your current financial situation, not your credit history.
The most desirable type of federal loan (because interest doesn’t accrue while you’re in school, like some federal student loans), the Direct Subsidized Loan, has relatively low fixed interest rates that are set each year by the government.
Subsidization means that the government will pay for any interest that accrues while you’re in school at least half-time as well as during your grace period and some deferral periods. Direct Subsidized Loans are awarded based on financial need and are only available to undergraduate students, but for those who qualify, they are a solid loan option.
The other type of no-credit-required federal loan is the Direct Unsubsidized Loan. It also typically has low interest rates, but no subsidy means the interest starts to accrue as soon as the money is loaned and borrowers are required to pay all the interest that accrues at all times. Unsubsidized loans are available to students at all levels of higher education and are therefore one of the most accessible types of student loans.
One advantage with both types of federal student loan is repayment flexibility, including deferment, income-driven repayment plans, or even forgiveness programs like Public Service Loan Forgiveness. If you’re trying to build or improve your credit score, repayment options that can help keep you out of default are key.
Private student loans
Students also have the option of applying for private student loans, which are available through some banks, credit unions or private lenders. The terms can be vastly different depending on the type of loan, whether you choose a fixed or variable interest rate, and for better or worse, your financial history—which includes things like your credit score.
If you’re facing less-than-stellar credit, or not much of a credit history and income, you’ll likely need to apply with a cosigner, typically a family member or a close, trusted friend who guarantees to repay the loan in the event that you can’t. It should be someone not just with a solid financial history, but also someone with whom you have mutual trust. (Here are our tips for choosing a co-signer wisely.)
Applying for student loans with FAFSA
The federal student loan application process starts by filling out the FAFSA (Free Application for Federal Student Aid). Filling out the FAFSA is completely free, and doesn’t commit you to accepting any type of loan. The FAFSA is also the tool used by many schools to determine a student’s full financial aid award, including scholarships, grants, work-study and federal student loans.
Applying for private student loans
To get a private student loan, potential borrowers will apply directly with the private lender of their choosing. Each loan application may vary slightly by lender as will the terms and interest rates. Private student loans do not have the same borrower protections that federal student loans offer, such as income-driven repayment plans or deferment or forbearance options. Therefore, they are generally considered as a last resort, after all other sources of aid have been exhausted.
Parent PLUS loans
Students aren’t the only ones who can apply for federal financial aid. Parents of undergrad students that are enrolled at least half-time, can apply to receive aid on their behalf via the Parent PLUS Loan. It’s another type of unsubsidized federal loan, but more restrictive in that both parents and children need to meet the minimum eligibility requirements. This type of federal student loan requires a credit check.
Like private loans, parents who don’t have optimal credit history may apply with a cosigner to guarantee the loan. And students are still able to seek additional unsubsidized loans for themselves to cover any gaps.
Tips for building credit
Entering college can be a smart time to start establishing credit. A borrower’s credit score can mean the difference between getting a good deal on a loan, or not getting a loan at all. Even a few points higher or lower can impact the interest rates a borrower may qualify for. Thankfully, there are a number of sites that let you see your score for free and offer notifications if there are changes, so it’s easy to keep track of where you are.
The number that signifies “good” credit is between 670-739, for FICO Scores. These scores are determined by factors such as the number of credit accounts a person has and how they are managed. One way to start building credit is to open some kind of credit account, and then make regular payments.
Paying bills on time, credit mix, and credit utilization ratio may all play a role in determining a credit score. While everyone’s circumstances are unique, generally try to make payments on time, and as a rule of thumb, keep the credit utilization ratio under 30%.
The takeaway
Most federal student loans do not require a credit check and are available to borrowers with no credit history. Parent PLUS loans are one exception as they are federal student loans that do require a credit check. Private student loans do require a credit check. Students with a limited credit history may have the option to apply with a cosigner if they are interested in borrowing a private student loan, though as noted earlier, adding a cosigner does not necessarily guarantee approval for a loan.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
Featured Image Credit: utah778/istockphoto.
