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Many parents wonder how they are going to pay for their child’s college education, especially since the cost of higher education seems to increase every year. However, borrowing for your child’s education can be more complicated if you have bad credit.
Fortunately, there are ways to find financing even if you have bad credit. Here’s what you need to know.
Start with Parent PLUS Loans
If you need to borrow student loans for your child, Parent PLUS Loans should be one of the first places you should look. These federal student loans allow you to borrow money on behalf of your child who is attending college. It covers the full cost of attendance minus any other financial aid the student receives, such as grants and scholarships.
For many, especially those with poor credit, federal student loans may be a better option than private debt. They are generally easier to obtain and everyone receives the same interest rates, regardless of your credit. They also come with greater protections, such as more flexible repayment options and forgiveness programs.
To qualify for a parent PLUS loan, you must be the biological or adoptive parent of a dependent undergraduate student who is enrolled at least part-time in school. In some cases, a step-parent may also be eligible.
While most types of federal student loans don’t require a credit check, a PLUS parent loan does, but there’s more leeway than you might think. To receive a PLUS loan, you cannot have “adverse credit,” which means you cannot have the following items on your credit report:
- Overdue account balances totaling more than $2,085 over the past two years; or the same amount collected or paid in the last two years
- A tax lien, foreclosure or repossession within the past five years
- Garnishment of wages in the last five years
- Cancellation of federal student debt over the past five years
- Accounts in default in the last five years
If you don’t have a lot of credit to your name or your score is low for other reasons, chances are you’ll be easily approved. There is no minimum credit score requirement, and everyone who qualifies for a parent PLUS loan receives the same interest rate.
If you have experienced credit issues like those listed above, all is not lost. You may still qualify for Parent PLUS Loans, but you will need to take additional steps.
Consider adding an endorser
If you cannot qualify on your own, you can add an endorser to your application. An endorser, similar to a co-signer, is someone who has no adverse credit history and agrees to repay the loan if the parent cannot. The endorser cannot be the child receiving the loan, but it can be another family member or a close friend.
Becoming an endorser carries risks: the endorser is legally responsible for repaying the loan if the primary borrower fails to do so, and any missed payments or negative marks will also appear on the endorser’s credit. However, if you cannot qualify for a parent PLUS loan individually, adding a trustworthy endorser could help.
If you are denied, submit an appeal
If you meet all other loan requirements and can prove that your adverse credit history is due to extenuating circumstances, you may appeal to the US Department of Education. Although approval is not guaranteed, a call may increase your chances of qualifying.
For example, if you were denied a PLUS loan because you previously had an account in collections, you might win an appeal if you can prove that the account has since been paid off or that you have consolidated the debt and have access to debt. a recent file over-time payments. See more examples of how you might appeal an adverse credit history on the Federal Student Aid site.
If you end up getting an endorser or successfully submitting an appeal, you will need to complete a 30-minute online credit counseling session before the funds are disbursed.
Look at private student loans Next
If you don’t qualify for PLUS parent loans, consider private student loans for parents with bad credit. Private student loans are administered by institutions like banks, credit unions, and online lenders. Some private lenders offer parent-specific student loans, but in other cases, private student loans can be taken out by the student and co-signed by a parent or another adult.
For private lenders, a strong credit score and track record are an important part of eligibility. If you apply with poor credit, you may not qualify, or if you do, you will likely face higher interest rates than with federal student loans. If you don’t have enough credit to qualify, you can add a co-signer with good credit to your application.
When shopping for private student loans, it’s a good idea to compare lenders and their requirements. Many lenders allow you to prequalify before you complete a full application, so you can see if you might qualify for a loan before committing to anything. Since there are no universal standards among private lenders, you may need to go through this step with multiple companies to find a loan you qualify for.
4 alternatives to student loans for parents with bad credit
Having bad credit makes it harder to borrow money. If you’re trying to get your child’s education loans and you’re having trouble, there are some things you can do.
1. Look for grants and scholarships
Grants and scholarships – free money that does not need to be repaid – must be used before taking out any type of loan. The more free money your child gets, the less they will need to borrow (and repay).
There are many scholarship and grant databases that house billions of dollars in awards. Look for different types of awards based on race, gender, socioeconomic background, field of study, and even general interests of the student.
2. Help your child apply for loans
College students typically have more borrowing options for college than their parents — and many student loan products are designed for borrowers with little or no credit. This means it’s probably easier and cheaper for your child to borrow money for their own education.
For example, most undergraduates are eligible for subsidized and unsubsidized federal student loans, which have a fixed interest rate of 3.73% for the 2021-22 school year. These loans require no credit checks, only come into repayment after the student has left school, and have flexible repayment plans that can be based on the student’s post-graduate income.
If you think you’ll have trouble qualifying for a parent student loan, help your child research the options available to them. There will likely be more loan opportunities to choose from at lower rates than a parent with poor credit could find.
3. Work to increase your credit score
If you are determined to borrow parent student loans, build your credit as much as possible before applying. You can do things like:
- Examine your credit report for errors. Review your credit report and verify its accuracy. If you find errors that hurt your score, you can submit a dispute with the relevant credit bureau. The office will investigate the complaint to determine if it is an error, and if so, the offending mark will be removed.
- Repay old debts. If you are behind on payments, consider paying off all old debts you can. Whether it’s a hospital bill or an overdue credit card, it’s a way to boost your score. You may find that lenders are willing to work with you on a new payment plan if it means they get some money back.
- Reduce your use of credit. Your credit utilization, also known as your debt-to-equity ratio, is an important part of your credit score. In short, it measures how much of your total credit limit you spend each month. If possible, keep your credit utilization below 30% to help your credit.
4. Consider other ways to help
If you’re struggling to find ways to pay for your child’s school, see if you can help in other ways. For example, you can reduce tuition costs by allowing your child to live at home while in school. If you think your child should be eligible for more financial help, you can help them appeal for more money.
If you have exhausted your other funding options, consider asking family or close friends to contribute towards tuition as a last resort. While it’s not an option for everyone, lean on your network if you’re lucky enough to have a family with means.
Before money changes hands, establish a written agreement (and repayment plan, if necessary) that works for everyone. This can help ensure everyone understands expectations and reduce misunderstandings later.
Student loans are an option, but not your only choice
Although loans are helpful for many students, other funding opportunities should first be fully exploited. Parents can help their children get all the free money they can by submitting the Free Application for Federal Student Aid (FAFSA) as soon as possible and applying for individual grants and scholarships.
Once this funding is exhausted, consider federal student loans to cover additional costs. If you still need more money after that, consider private student loans as a last option.
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