Students Loans and Bad Credit

Going to college is a time to grow intellectually, but many critical lessons extend beyond the classroom. Undergraduates with bad credit will learn that lenders regard them very differently when it comes to granting student loans.

If you're a college student with bad credit, you've earned yourself instant acceptance to a very undesirable academic institution: the school of hard knocks. The curriculum includes plenty of tough lessons on money management. And this particular lesson will cover how your poor credit score affects the quality and availability of a student loan.

Credit score equals interest rate

A prerequisite in this course of study involves understanding your credit score. They're calculated by credit bureaus, which track your payment history on your credit cards and outstanding loans. The score is based on the timeliness of your payments, as well as the amount of your debt load. If you have bad credit, you can expect a lower credit score.

When lenders offer student loans, they carefully analyze your credit score, and price your interest rate accordingly. If you have a low score, expect to pay a higher rate. This is how lenders limit their exposure to risk. The extra money that they make from a higher interest rate is designed to balance the higher rate of loan defaults common for borrowers with bad credit.

Different ground rules

If you have bad credit, you can expect to jump through a few more hoops to get financing for a student loan. You also may be required to have someone co-sign it with you. A co-signer is generally someone closely related to the borrower, who's required to have excellent credit. If someone co-signs a loan for you, she's putting her credit score on the line. If you fail to make your student loan payments on time, you jeopardize the co-signer's good rating.

You can also expect a longer application process. Someone with excellent credit has the luxury of applying for a student loan online or emailing an application. If you have poor credit, however, you'll need to personally contact a loan officer and discuss your financial situation. Be prepared to detail the reasons that you're in this less-than-desirable situation, and provide compelling reasons why your habits are going to change. Remember, your rate-and therefore your payments-depend on how risky a borrower the bank considers you.

If you're fortunate enough to find a lender who'll offer you a student loan, you'll (hopefully) learn from your past mistakes. If you have a high interest rate as a result of your spotty credit, there's no time like the present to begin making amends. Budget your money, and deliver those monthly loan payments on time. If you improve your credit score, your next loan will be a better one-and your hard-earned degree from the school of hard knocks will be your first step toward a post-graduate life with improved personal finances.