Unlock Better Rates By Building Good Repayment Habits

Having good credit unlocks many doors, including some of the best rates for student loans.  Even though the Federal Direct Student Loan does not look at credit in order to lend to college students, Private Student Loans, Private Parent Loans, and even Federal Direct Parent PLUS Loans look at your credit in order to decide whether or not to let you borrow or even what interest you will be offered. 

Private Student Loans and Credit

Private Student Loans most often want the student (the primary borrower of the loan) to have a creditworthy co-signer.  Most students will ask a parent or relative to be their co-signer, but some will ask a friend.  To be creditworthy, the co-signer will need to have a positive and lengthy credit history.  Just make certain that the co-signer knows what they are signing up for.

The lender will determine the Private Student Loan variable or fixed interest rate based on their assessment of the co-signer’s credit score.   People with the best credit scores (typically this is the 800s) will be offered the best interest rates.  Each lender has its own methodology for reviewing credit scores.  They will bucket people into specific interest rates based on the credit score from as little as one rate for everyone or as many as dozens of interest rate buckets.  To gauge your interest rate, total financing costs, and monthly repayment amount, check out our College Finance Planner.

Quick Tip:  Some students with their own positive, robust credit history and/or a steady income may be able to borrow a Private Student Loan by themselves.  Check with the lender to see if this is an option.

Private Parent Loans and Credit

Much like Private Student Loans, lenders assess the creditworthiness of the parents in order to offer Private Parent Loans. Typically, Private Parent Loans just have a parent as the sole borrower of the loan, but occasionally, lenders may offer parents the ability to add a creditworthy co-borrower who is equally responsible for the repayment of the loan.

Although  the borrower selects whether they want a fixed rate or variable rate loan, the lender will decide the interest to be offered based on the credit score of the borrower. This means that the better the credit score, the better the interest rate will be. 

Federal Parent PLUS Loans and Credit

Federal Parent PLUS Loans don’t look at the parents credit score but they do look at a parent’s credit history to determine if they have an adverse credit history. The federal government defines an adverse credit history as exhibiting the following poor financial habits:

• Delinquency of debt of $2,085 or more from one or more outstanding balances of 90-day or more
• A history of being in collections during the 2 prior years of $2,085 or more from one or more outstanding balances
• A charge off(s) during the 2 prior years of $2,085 or more from one or more outstanding balances
• A default determination during the 5 prior years
• A discharge of debts in bankruptcy, foreclosure, repossession or tax lien during the 5 prior years.
• Garnished wages during the 5 prior years
• A tax lien of federal student aid during the 5 prior years

Parents who are denied a Federal Parent PLUS Loan have several alternatives like appealing the credit decision, getting an endorser, or requesting their student gain additional unsubsidized Federal Direct Student Loan eligibility.

Pro Tip:  If you have time before you need to borrow a student loan, then work to improve your credit.   Start by reviewing your credit report from one of the major credit reporting agencies.    Each year, you are eligible for one free credit report from each agency, but the major credit report agencies are offering free weekly online reports through April 2021 during these challenging economic times.  Then, check the report for accuracy and appeal if you see something wrong.  Also, ensure that you have no outstanding payments and make all your credit payments on time.