Can You Get a Student Loan When You Have Bad Credit?

Can You Get a Student Loan When You Have Bad Credit?

Eric Bank |Sep 22, 2021

Get the Loan You Need for Your Education

Bad credit is often an impediment when you apply for a loan or a credit card. Happily, the story is different for student loans, because the federal government bases these loans on financial need, not credit score.

However, if you need additional student loan proceeds or do not qualify for a federal loan, you can turn to a private student loan, where credit is definitely a big factor. In this article, we will explore the student loans available to you and how to get them, in particular student loans for bad credit. Be sure to consult a loan calculator so you are aware of all the aspects of a loan you need to consider before signing on for one.

What Are Student Loans?

Student loans help pay for the costs of attending college. They are a form of financial aid, as are grants and scholarships. Access to student loans makes college and graduate school attendance possible for millions of Americans each year.

Most student loans are issued by the federal government, but you can also get a non-federal private loan from a school, state agency, credit union or bank.

Federal Student Loan Programs

The federal government’s William D. Ford Federal Direct Loan Program offers four types of direct loans:

  • Direct Unsubsidized Loans: You can get these even if you do not demonstrate a financial need. Loan interest accrues when the money is disbursed.
  • Direct Subsidized Loans: The interest on these is deferred when you are in a non-payment status — during school attendance or during the grace period after graduation.
  • Direct Consolidation Loans: Combines separate federal loans into one.
  • Direct PLUS Loans: For professional/graduate students and parents of dependent undergraduates.

In addition, the Perkins Loan Program consists of loans made by the school to students with exceptional financial need.

Private Student Loans

These are student loans from banks, credit unions and other private sources. The lender sets the terms and rates, which are generally higher than the federal government’s. Rates are fixed or variable. A credit check is mandatory, and repayment begins immediately. These loans lack many of the options provided by government loans.

What Options Are Currently Available?

Generally, you will get a better deal by choosing a federal student loan over a private one, for the following reasons:

Interest Rates

Federal student loan interest rates are lower than those available from private sources. Rates for private student loans can be fixed or variable, and vary by lender and borrower — those with high credit scores pay lower private loan interest rates.

The initial teaser rate on private variable student loans might start out lower than the federal loan rate, but typically rise considerably after the first year, sometimes as high as 18%.

Repayment Benefits

Federal student loans offers several borrower-friendly repayment options not available on private loans. Federal student loans for undergraduates may be subsidized, meaning the government pays the interest for as long as the loan payments are deferred, including while the student is attending school at least half-time and for a period following completion of study (the grace period).

Private student loans are not subsidized and usually require repayments right away, while you are still attending school. Federal student loans can be postponed, and monthly payments can be based on your income, two features not necessarily available from private loans. You may also obtain federal loan forgiveness if you work in public service after finishing school, a feature not available from most private loans.


Federal loans are based on need, not ability to repay, and therefore do not require cosigners to help guarantee the debt. Private student loan access and cost are based on credit scores. If you have a low score, you might need a co-signer to help get a private student loan.

Obviously, this creates risks for cosigners, as they are on the hook for missed payments and may suffer credit score damage for late or missing payments. Co-signers increase their credit utilization ratio, which could raise the cost or availability of future credit.


Federal student loans have no prepayment penalty fees. You will have to check the fine print of a private loan for any prepayment penalties.


Federal student loans (but not private ones) can be combined into a Direct Consolidation Loan featuring a single monthly payment and access to an income-based, income-contingent or pay-as-you-earn plan. The interest rate on a consolidation loan is a mix of the rates on existing loans. Private loans can be privately refinanced, but this may require a higher interest rate.


A single application form, the FAFSA, is used for all federal student loans. If you apply to multiple private borrowers, you will have to fill out an application form for each.


You may be able to deduct the interest on your federal student loan from your income. No such tax break exists for private loans.


You avoid scams when you borrow student loans from the federal government. No such assurance exists for private loans. Fraudulent private lenders might ask for an upfront payment, or falsely promise lower payments or relief from garnishment. Another scam is to charge a fee for refinancing your loans.


The Department of Education’s Student Aid website is a valuable resource to learn about all aspects of student loans. Some private lender websites are also good, some not so much.

Private loans are still a viable choice if you have a good credit score and do not qualify for a federal loan. Also, you can refinance a mix of private and federal student loans but cannot include private loans in a federal Direct Consolidation Loan. Ultimately, your financial situation will dictate whether you qualify for federal student loan, but if you can, it is definitely your best choice.

How to Apply for These Specific Loans

You obtain federal student loans by filling out the Free Application for Federal Student Aid (FAFSA). Students with good, bad or no credit are treated equally. State agencies may also use the FAFSA or provide their own application forms.

If you prefer a private loan, you must complete the lender’s application paperwork. If you have bad credit, you will need a cosigner who has good credit in order to get most private student loans. Alternatively, some private lenders accept applicants with bad credit and no cosigner, but be prepared to pay a high interest rate.

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Katie Macomb | September 22, 2021

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