Student Loans for Parents With Bad Credit: How to Finance Your Child's Education

Financing your child’s education can be challenging, especially with poor credit. But it doesn’t have to be an impossible one. From Parent PLUS Loans to private lending, there are more than a few options that are still available to you. Let’s take a look at the pros and cons of each one to help you find the right option for you. Here’s a rundown of student loans for parents with bad credit.

Don’t forget to first apply for financial aid through your institution’s financial aid office though. Depending on your income, your child may qualify for a financial aid package that could significantly reduce or negate your need for student loans in the first place.

Each institution typically has several scholarships and grant programs available to its students. Scholarships are typically merit-based, meaning they are awarded based on academic or athletic achievement, or other special talents or interests. They can be offered by various entities such as colleges, non-profit organizations, private companies, or even the government. Most scholarships have prerequisites such as maintaining a certain GPA, competing in a particular sport, or participating in specific extracurricular activities.

Grants, on the other hand, are typically need-based and are awarded to students who demonstrate financial need. The most common provider of grants is the government, though they can also be offered by colleges and private organizations. Eligibility for grants often depends on the student’s or their family’s financial situation. They intend to make education accessible to students who may not have adequate financial resources.

Related: Do You Have to Pay Back Grants: It Depends

The Parent PLUS Loan program is the logical starting point for parents seeking to finance their child’s college education, especially if they have a bad credit score. These are federal loans provided by the U.S. Department of Education, available to parents of dependent undergraduate students, irrespective of their credit scores. Although having an adverse credit history may affect your eligibility, it doesn’t necessarily mean you’ll be disqualified.

Related: What Is A Parent Plus Loan: A Complete Guide

Here’s How Parent PLUS Loans Work

You, the parent, will become the borrower and therefore the sole holder of the parent loan. Your child will not be beholden to repay at any point making it unique in the federal student loan landscape. Here’s the overview:

• Eligibility and Limit: The amount you can borrow is generally the cost of attendance (determined by the school) minus any other financial aid received.

• Interest Rate: While the interest rates on Parent PLUS loans can be relatively high compared to other federal student loans, they are still often lower than those on private loans, especially for borrowers with a bad credit score.

• Application Process: To apply, parents must complete the Free Application for Federal Student Aid (FAFSA) and meet some basic requirements.

• Repayment Terms: the Parent PLUS Loan program requires repayment to begin while the child is still in school. Parents can request a repayment deferment while their child is enrolled at least half-time and for an additional six months after the child graduates, leaves school, or drops below half-time enrollment.

In short, the pros of this program are that it’s accessible, and unless you have adverse credit, you most likely will be eligible for the program. There are ways to later get these parent loans forgiven as well as they are federal and therefore subject to the evolving landscape of student loan repayment and forgiveness options. The cons are that the interest rate is relatively high but they will likely be lower than the private route.

You Can Appeal If You Are Denied

If you’re denied a Parent PLUS Loan due to an adverse credit history, don’t worry. You may seek reconsideration of your application by following these steps:

1. Review the Reason for Denial Your credit denial letter will point out the reasons for the denial. It might be due to unpaid debts, a recent bankruptcy, or other credit score issues. Understanding the root cause of the denial is the first step to addressing it.

2. Resolve Credit Issues Once you’re aware of the credit score issues that led to the denial, take steps to resolve them. This might mean paying off delinquent accounts, resolving errors on your credit report, or taking other actions to improve your creditworthiness. However, this may not be possible for everyone, especially in a short time frame.

3. Consider a Loan Appeal If resolving the credit issues is not possible, you can appeal the parent loan decision with the Department of Education. You’ll need to provide documentation to show that there are extenuating circumstances relating to your adverse credit history. This could be evidence of a payment arrangement with a creditor, or documents to show that the debt was paid in full or is uncollectable.

4. Find a Cosigner If your appeal is denied, another option is to apply with an endorser, essentially a cosigner, who does not have adverse credit. The endorser promises to repay the parent loan if you are unable to. Note that the endorser cannot be the child on whose behalf you’re applying for the loan.

5. Complete PLUS Credit Counseling Whether you’re appealing the credit decision or applying with an endorser, you’ll be required to complete PLUS Credit Counseling offered by the U.S. Department of Education. This is a free online tool designed to help borrowers understand their parent loan responsibilities.

Remember, every financial situation is unique, and it may take time to find the right solution for you. Nevertheless, a denial of a Parent PLUS Loan does not mean the end of your journey to finance your child’s education. In cases where a parent is denied a Parent PLUS Loan due to adverse credit, the dependent student may become eligible for additional unsubsidized loans or you can consider the following options next.

If Parent PLUS loans don’t fit your needs, or if you require further financial assistance beyond that of the school’s financial aid, private student loans can serve as a viable alternative. These loans are offered by banks, credit unions, and other lenders, and can help close the gap between financial aid and the total cost of education.

• Credit Checks: Unlike federal loans, private student loans will require credit checks before making a lender offer. However, it doesn’t mean those with bad credit are automatically out of contention. Some lenders are willing to look beyond bad credit scores and consider factors such as earning potential and academic records during their underwriting process.

• Securing Loans with a Cosigner: Most private student loans taken by parents with bad credit involve a creditworthy cosigner. This can significantly increase chances of approval and possibly reduce the interest rate. Nonetheless, the cosigner will share the liability for repaying the loan.

• Interest Rates and Fees: Private student loans often have higher interest rates and fees compared to federal student loans. It’s essential to carefully research and compare lenders to get the best possible terms for your situation.

The pros of private student loans are that they can offer larger loan amounts, but the cons are that the interest rates are likely the highest of all your options and the repayment terms are usually less flexible than those of federal student loans.

Related: How to Lower Private Student Loan Repayments: A Guide

Compare Student Loan Rates

Don’t forget to take this step if you are going to go with the private lender route for your parent loans. Even a fraction of a point in your interest rate can make a big dent in how much you pay over time. A full point will drastically impact your monthly payment. And remember, you won’t have the forgiveness or payment management options that come with federal student loan programs either. So carefully research and consider the best rate possible for you before accepting the lender offer for your private student loan.

If your creditworthiness alone is insufficient to secure a student loan, obtaining a cosigner might pave the way. A cosigner is someone with a strong credit history who agrees to share responsibility for the loan. This could be a relative, a family friend, or anyone willing to back the loan.

Should the primary borrower fail to make payments, the cosigner would be legally obligated to do so.

Having a cosigner not only increases the chances of loan approval but could potentially qualify you for lower interest rates. But both parties must understand the responsibility and potential risks involved. Communication, trust, and a clear agreement are crucial in such situations.

Related: The Cosigner’s Guide to Student Loans

If it is still proving challenging to obtain or co-sign a student loan, another option could be to have the student borrow the loan.

It’s common for federal student loans not to require any credit check, and therefore students themselves could qualify independently for Direct Subsidized and Unsubsidized Loans.

Some of these federal college loan programs have more repayment and forgiveness options available down the line, which is something worth considering.

Ultimately, having the student bear some or all the responsibility of the student loan can be a practical solution, though it’s important to ensure they’re up for the challenge and understand the long-term commitment they are undertaking.

Related: Check out our comprehensive guide on Borrowing here

 

Improving your credit score could help you get a better rate, or make you eligible for other options.

Begin by obtaining a free credit report from the three major credit bureaus: Experian, TransUnion, or Equifax. Review the report for any mistakes and dispute them if necessary.

Furthermore, aim to pay all your bills on time as late payments can negatively impact your credit report. Try to pay down your existing debts, particularly high-interest credit card balances, and avoid taking on new debt.

Lastly, maintaining a low credit utilization ratio – that is, using a small percentage of your available credit – can also help improve your credit score.

Remember, improving your credit score is a marathon, not a sprint, and requires consistent long-term financial habits so ideally, you would begin this process well before your child’s enrollment begins.

If you have a bad credit score, you can still finance your child’s education. More often than not, Parent PLUS Loans are going to be your best route. But if you don’t qualify, or you prefer other options there are a number of them. Private loans, scholarships, grants, cosigning, and having your child take out a student loan are all viable paths. They differ in terms of their eligibility requirements and ultimately the long-term strategy you want.

Want to chat about it to be sure before you lock yourself in? Feel free to book a call with me and we will put together a plan that works for you.