Bad credit can affect student financial aid and loans in surprising and opposing ways – depending on where you obtain the funding help.

The federal government operates using a progressive ideology. Government-sponsored finance is needs-based. Therefore, people with bad credit are more likely to qualify for student financial aid and loans with guaranteed approval, without a cosigner.

Private lenders operate under a free market model. Therefore, people with bad credit often need a cosigner in order to take out a private student loan to fund the full cost of college attendance.

Parents with bad credit find more sublte differences between federal and private funding sources.

Does Bad Credit Affect Student Financial Aid?

Having a bad credit score does not directly affect student financial aid – the amount you receive in needs-based scholarships, grants, and work-study programs. The Free Application for Federal Student Aid (FAFSA) form does not check your credit report or rating.

However, college funding may be the one place where having a poor credit score can be a good thing. Many of the factors leading to a low rating also translate into greater levels of needs-based financial aid. Since you do not have to repay scholarships and grants, performing poorly on any of these two main credit rating factors can really pay off!

  1. Payment history 35%
  2. Amounts owed 30%

The federal government and many colleges determine the amount of financial need based on a formula. Your expected family contribution (EFC) determines your eligibility for grants and scholarships, which reduce your cost of higher education.

  1. The projected cost of attendance
  2. Minus your expected family contribution
  3. Equals your financial need

Payment History

A history of late payments often leads to a bad credit score, but will not directly affect FAFSA  or your eligibility for financial aid programs. The FAFSA form does not run a credit check to determine if you pay your bills on time, but it does ask about income – which indirectly influences your credit rating.

Households with lower and/or inconsistent incomes are more likely to have a history of late payments on their consumer report. People borrow money expecting to repay the obligation from future earnings.

FAFSA form questions 36 – 45 address student income, and questions 80 – 89 address parents’ income. People from low-income household tend to have:

  • Lower expected family contribution
  • Higher financial need
  • More financial aid

Amounts Owed

A large amount owed can lead to a poor credit score, and can directly help your eligibility for financial aid. While FAFSA does not pull a copy of your credit report, it does ask for very detailed information about net worth. You calculate net worth by subtracting debts from assets.

FAFSA form questions 90 – 92 deal with your parents’ net worth. Someone with a lower net worth tends to have:

  • Lower expected family contribution
  • Higher financial need
  • More financial aid

Does Bad Credit Affect Getting a Student Loan?

Having bad credit often affects your ability to qualify for a student loan program. Since you must repay the money in full with interest, you are more likely to feel the negative consequences – except when the government exerts its progressive ideology.

Therefore, expect to find radically different consequences between federal and private student loans – in all cases but one. Do not expect any special considerations for nursing degrees, single mothers, emergency needs, living expenses, consolidations, or private and public universities.

This premise holds true if you are looking for guaranteed approvals and options with and without cosigners. Parents with bad credit have fewer alternatives.

Parents with Bad Credit

Any parents with bad credit will find it very difficult to obtain either a federal or a private student loan to help their child attend college. If you fall into this category, return to the top of this page – as financial aid is perhaps more viable.

Federal Parent Loans for Undergraduate Students (PLUS) offer a single fixed rate for all accepted applicants. Parents can borrow up to the full amount of the estimated cost of attendance. However, parents with an adverse credit history may not meet the requirements if they cannot compensate in one of these two ways.

  1. Find an endorser without an adverse history
  2. Satisfactorily document extenuating circumstances

Parents with bad credit can also apply for a private student loan. The approval criteria may be slightly different at each company. If accepted, expect the private lender to charge a higher interest rate to compensate for their increased exposure.

For example, as of January of 2017, the Sallie Mae parent loan offered two sets of interest rate ranges. Parents with the best qualifications obtain the lowest rates, and those with the poorest credentials pay the highest rates.

  • Variable interest rate: 4% to 10%
  • Fixed interest rate: 6% to 13%

Guaranteed Approval

Bad credit student loans with guaranteed approval are available through the federal government for the person attending college – not parents. They make lending decisions based on information found on FAFSA form – which does not include credit report information on the application.

Three different federal student loans do not involve a credit check.

  1. Direct subsidized loans
  2. Direct unsubsidized loans
  3. Perkins loans

There is one big drawback to the federally guaranteed approval. You cannot borrow the full cost of college attendance. There are yearly and total borrowing limits. Private lenders will not offer guaranteed acceptance student loans. If you have bad credit and face a funding gap, scroll back to the top of the page to review the financial aid considerations.

Without Cosigner

Stick with the federal government if you are looking to obtain a bad credit student loan without a cosigner. In addition to guaranteeing approval with no credit check, this option also does not require another person to endorse the application.

Once again, the federal alternative does not allow you to borrow up to the full cost of college attendance. Obtaining a bad credit student loan without a cosigner from a private lender is not realistic. They follow free market principles. Scroll back to the top to review financial aid implications.

With Cosigner

Bad credit student loans with cosigners through a private lender are the most viable option to close the funding gap. The federal government will not finance the full cost of college attendance. You must find the money from somewhere if you do not qualify for financial aid, or a company denied your loan application. You may be asking “now what?”

A cosigner with a good credit score and sufficient income and work history can help you gain acceptance from a private student loan company. The cosigner is responsible for making payments in the event you are unable to. This requirement makes it less risky for the company to approve your application.