Moneyman's College Financial Aid Blog

I am a logic puzzle fan. I enjoy solving puzzles like The Lady or the Tiger, or figuring out Nonograms. So when I logged into my browser this morning and this article popped up (“The Logic Puzzle You Can Only Solve with Your Brightest Friend”), I was happy to waste spend a few minutes playing my way through it. Go ahead; try it. I’ll be right here waiting for you when you get back.

So, did you solve it? I admit, I needed a little help on that one. Just like you might need a little help with today’s blog post – all about Parent and Student loans and the impact of your credit history on them.

Let’s start with some definitions. There are two main types of loans for education: parent loans and student loans. As you might guess, the main difference between them is who is defined as the borrower. For parent loans, the parent (or parents) borrow for the student (and sometimes, depending on the loan, the student may be a co-borrower). For student loans, the student borrows (although for many private loans, a parent or other “adult” must be a co-borrower). So you can see, often the main difference is simply who’s name is listed as the main borrower.

The second important piece to know is who is doing the lending: is this a Federal or Private loan? In the case of Federal loans, the Federal government is the lender; these are called Direct Loans (Direct Subsidized Loans, Direct Unsubsidized Loans and Federal PLUS Loans). For Private Loans, the lender could be a bank, a credit union, or a state financing agency; Private Loans come under various names and have lots of different terms and conditions.

Federal Direct Student Loans (Subsidized and Unsubsidized) have loan limits, depending on a students grade level (the farther along in your career, the more you can borrow per year). For Graduate Students, the only Federal Direct Student loan available is Unsubsidized. The main difference between Subsidized and Unsubsidized Loans is who pays the interest while the student is in school or in grace period: if Subsidized, the Federal government covers the interest payments during the in school, grace and deferment periods, while for Unsubsidized Loans, the student is charged the interest and can either pay the interest off each month while in school or can defer the interest until payments start, but the interest will be added to amount owed at that point. Students borrow these loans with no cosigner. In addition, note that to qualify for these loans you must complete the FAFSA,

The other kind of Federal Loan is the Direct PLUS Loan. There are two types of these: Undergraduate PLUS Loans for Parents, and Graduate PLUS Loans for Students in graduate degree programs. These loans are available up to Cost of Attendance minus other aid. The interest rate for these programs is higher than the rate for Direct Student Loans, and interest charges begin immediately; there is no interest subsidy.

So what about credit? Does your credit history matter when it comes to Federal Loans? There is no credit check for Direct Student Loans (Subsidized or Unsubsidized). As long as a student has not defaulted on a previous Direct Loan, and does not owe back an overpayment for a Federal grant, then she can receive a Federal Direct Loan. Even a student in default on a previous loan can make a limited number of payments to rehabilitate their loan and qualify for future loans.

For PLUS loans (both for parents of undergraduate students and for graduate students themselves), a credit check is run, but as long as the applicant does not have “adverse credit history” they will qualify for the loan. Adverse credit history basically means being 90 days or more past due on a current obligation, or having other more serious examples of repayment difficulty (see the link above). Note that nowhere above does the definition refer to credit scores; and any student who is approved gets the same interest rate and terms. There is no reward for better credit history from the Federal government, but neither is there any punishment for lower credit scores (as long as you do not meet any of the definitions above). If you do have an adverse credit history, you may be able to add a cosigner or explain the situation that caused your adverse credit history and still qualify.

Private loans on the other hand absolutely look at your credit score. The better your credit score, the better interest rate will be offered to you (and sometimes the rate could be better than the Federal government’s interest rate on their loans), the more flexibility you will have around length of repayment, and the less likely you will need a cosigner. Private loans may also look at your ability to repay (using a debt-to-income ratio) to ensure that you can afford your monthly obligations (and they will likely use your credit report to determine what loans and other obligations you currently have).

So, long story short, most Federal loans don’t require perfect credit, and if you have significant credit issues you can work through them; however interest rates can be higher than private loans, and terms aren’t generally as flexible. Private loans can be a better choice for student or parent borrowers with excellent credit, but these loans don’t have as many benefits as Federal Loans (more about these in a later post), and for student borrowers will generally require a cosigner.

So what did I miss? What questions do you have? Let me help you solve this puzzle!