Bad Credit Student LoansLenders will evaluate your credit score to determine whether you qualify for private student loans. Your credit score indicates your likely ability to repay the loan amounts, and lower credit scores often indicate that the borrower poses a higher risk to the lender than lower scores. Lenders calculate your risk and determine whether you qualify for a student loan by evaluating your debt to income ratio. They will specifically review any adverse actions on your credit report and evaluate your payment history with creditors and the amounts owed on certain debts. When applying for private loans, lenders may agree to offer you a specific loan amount. However, the loan limit may be lower and contain limitations on the use of the loans. For instance, many lenders require that funds must only be used for school expenses.
Applying for Private Student Loans
Unlike federal student loans, whereby the loans are guaranteed by the federal government, private student loans issued by private financial institutions are backed by investor deposits and asset-backed securities. Federal student loans are issued to students based upon the school’s participation in certain federal student loan programs. However, schools are not involved in your process of applying for student loans with private lenders. When you apply for a private student loan, your application will undergo an underwriting process to determine your eligibility for a loan, the interest rate and the loan term. With a low credit score, it is beneficial to request an amount that only covers your education expenses, since private loans may carry high interest rates. Since schools are not directly involved with your search for private education loans, some students—in the past have borrowed more than what is needed to finance their education and eventually increased their debt load. However, when applying for a private student loan, the lender may require you to certify your need to finance your education costs and demonstrate proof of an estimated amount of the costs.
Lowering Interest Rates
Using a co-signer to assist you with your application for a private student loan can significantly reduce the interest rate as well as increase the loan limit. Depending on the life of the loan, a lower interest rate can reduce the monthly repayment costs and the accrued interest charges. Financial institutions require at least one borrower to be credit worthy and have an established credit history. The primary borrower or the co-signer must be currently employed or have a reliable source of income, and the credit score must be within a certain threshold.
Some private student loans contain variable interest rates and risk-based pricing. Individuals with lower credit scores may be offered variable rates rather than fixed interest rates. Variable interest rates can increase at any time, and thus, the lender may require you to make higher monthly payments towards the outstanding balance of the loan. To increase your options to acquire higher loan limits with fixed interest rates, a co-signer is beneficial.
Applying for Plus Loans
Plus Loans are available to parents of undergraduate students, and Grad Plus Loans are available for graduate and professional students. Both types of loans are credit-based student loans, in which the borrower must meet specific eligibility requirements to qualify. Rather than undergoing an underwriting process with a private lender, the Department of Education will evaluate your credit score and credit history to determine whether you qualify for a Plus Loan. Upon approval, a Plus Loan will be included with your financial aid award from the school.
To apply for a Plus Loan, you will need to complete a FASFA form, which may be completed online (www.fasfa.ed.gov). Students and parents may submit the application form. Subsequently, the Department of Education will determine your Expected Family Contribution (EFC) by evaluating the yearly income and value of assets. Your EFC report will be sent to all of the schools that you list on the FASFA application, and your school will calculate your Cost of Attendance by including the tuition fees, books, food, housing and transportation. However, if you opt to acquire housing that is not connected to your school’s student housing arrangements, the school will omit certain categories when determining the amount of your cost of attendance. The school will deduct your Expected Family Contribution from the Cost of Attendance and apply the Plus Loan funds and other federal student loan funds towards your education expenses, including tuition fees, housing and other school charges.
Plus Loan Interest Rates
Plus Loans incur fixed interest rates of 7.9%. The maximum amount that you are eligible to borrow is calculated by the amount of your Cost of Attendance minus other federal financial aid awards. Plus Loans are beneficial for students with poor credit, because the eligibility criteria to qualify for Plus Loans are lenient and not as rigorous as the process to apply for a student loan with a private lender. Although a credit check will be performed to determine your eligibility for a Plus Loan, The Department of Education may approve the loan, if you are able to provide documentary proof that explains extenuating circumstances to justify any adverse credit actions that may appear on your credit report.
Subsidized and Unsubsidized Loans
Direct subsidized loans are issued to undergraduate students based upon financial need. Based upon your school’s calculation of your Cost of Attendance, the Department of Education may limit the amount that you can borrow depending on your educational costs. If you are offered subsidized loans to assist with your payment of your education expenses, the Department of Education pays the interest accrued on the loan while you are attending school for at least half-time. The Department of Education also pays interest within the six month grace period following your graduation and also during deferment periods. However, if you are issued direct subsidized loans between July 1, 2012 and July 1, 2014, you will be required to pay the interest accrued to the principal balance of your loan during the six month grace period following your departure from school.
All graduate and undergraduate students qualify for direct unsubsidized loans. Unlike direct subsidized loans, you may qualify for unsubsidized loans without demonstrating a financial need. Similar to subsidized loans, your school determines the highest amount that you can borrow for unsubsidized loans based upon your Cost of Attendance. While attending school, during the six month grace period and during deferment periods, you will be responsible for paying the interest rates accrued to the principal balance of direct unsubsidized loans.
Whether you choose to obtain subsidized or unsubsidized loans, the interest rate charges are automatically added to the principal balance of the loan regardless of whether you or the Department of Education is responsible for paying the interest charges. For federal student loans, you will incur fixed interest rates. However, your actual repayment amount for subsidized loans may significantly differ than the balance for unsubsidized loans. Interest rates can dramatically increase the amount of balance of the loan, and as unpaid interest rates accrue on unsubsidized loans, your balance may double over time. For loans disbursed between July 1, 2012 and June 30, 2013, the interest rate for direct subsidized loans is 3.4%; the interest rate for direct unsubsidized loans is 6.8%. Interest rates are adjusted annually on July 1st of each year, and the rates will not exceed past 8.25%.
Additional Loan Charges
In addition to the interest rate charges accrued on the principal balance of federal student loans, you will also incur loan disbursement fees that will also be added to the principal balance of the loan. There is a 1% origination fee and a 0.5% interest rebate fee. These fees are applied to the loans at the time the loans are disbursed to the schools.
By investing in higher education, there will be college expenses that you are likely to incur in addition to the costs for tuition, books and course fees. It is important to ascertain the maximum amount you are able to expend for education costs. If you have credit issues and your ability to acquire private student loans are limited, there are ways to pursue your educational goals without spending your life savings or simply too much money to attend school.
One of the simplest ways that many prospective college students save money is by attending in-state college institutions. Most colleges and universities that are within your state offer lower tuition costs to resident students. There may be a requirement to establish your residence in the state, such as providing a physical address and identification, such as a state ID or driver’s license.
Although the tuition costs will be slightly lower for in-state students in comparison to out of state students, the costs for books and other fees remain the same. You can also decide to utilize the room and board options that the school offers or choose to find your own housing accommodations. Some colleges and universities may not offer room and board to students, but many schools that accept a significant portion of out-of-state students typically offer college dorms for current and incoming students. If you choose to utilize the school’s room and board options, the school will include these expenses within the calculation of your Cost of Attendance. Therefore, you may need higher amounts of federal student loans as well and private loans to cover for room and board expenses.
In addition to room and board fees, tuition fees and other fees related to registering and completing courses, you will have daily expenses of food, clothing and other basic necessities. With most college institutions that offer room and board to students, these students will automatically receive meal vouchers or meal cards to attend the school cafeteria during consecutive time periods each day. The costs associated with being able to dine in the school’s cafeteria are also included in your school’s calculation of your Cost of Attendance. Depending on your school’s policies, off-campus students may also have opportunities to acquire meal cards and vouchers for the school’s cafeteria.
Lowering Education Costs
Because the costs associated with completing your educational goals can be very high, there are easy ways to considerably lower the expenses to more affordable amounts. Federal student loans and private loans can double over time. Thus, the amount of student loans that are used during school does not equate to actual amount you will be required to pay upon leaving school regardless of whether you obtain private loans, federal loans or a combination of both sources of student loans.
You can lower your Cost of Attendance by not participating in room and board options and meal plans with the school. In many small college towns, there are off-campus housing accommodations, such as rental houses and apartments offered specifically to college students. Many property owners who offer these accommodations typically charge college students lower rent charges than individuals who do not attend college. By utilizing this option, you will pay your housing fees directly to the property owner. This will ultimately decrease your student loan debt that you will be required to pay upon leaving the college institution. If you plan to attend school within your resident state, you may also choose to live at your current home, if it’s located near an easily drivable distance to the school as well as other transportation options.
Researching Loan Options
Before choosing to obtain student loans, always consider the fees and interest rates that will be added to the principal balance of the loan. Try opting for student loans with fixed interest rates rather than variable rates, since it is easy to foresee the actual amount that you will be required to pay in the future with fixed interest rate charges. For federal loans, if you can demonstrate a financial need, it is beneficial to apply for direct subsidized loans. Subsidized loans include better loan terms than unsubsidized loans, which can also considerably reduce your student loan debt upon leaving the college institution. If you choose to utilize private student loan options or federal Plus Loans, consider only borrowing the actual amount that is needed to help you fund your education. If you choose to borrow more than your actual educational costs, you are likely to incur larger amounts of student loan debt after graduation.
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