After 12+ years of schooling, it’s time for your reward — more school! If you’re heading to college this fall, you may wonder if the amount and interest rate of your student loans are dictated by a credit score you likely don’t have yet. Here’s what you need to know about credit and student loans.
Student loans: Federal vs. private
Federal student aid is available for U.S. citizens or eligible noncitizens with financial need enrolled in an eligible degree or certificate program. Federal loans don’t require a credit history or a cosigner. Furthermore, all undergraduate students enrolled at the same time will receive the same interest rate as their undergraduate peers. Graduate students pay a higher interest rate than undergrads, but will still pay the same rate as other graduate students. Federal student loan interest rates aren’t set according to credit scores.
However, students who don’t demonstrate a financial need based on their parents’ income may have to take out private loans. These loans are made by lenders, such as banks or credit unions, and have variable interest rates that are generally much higher than federal loan rates. As with any other loan, you’ll either need good credit or a cosigner with good credit to get approved for private student loans.
If possible, you’ll want to go for federal student loans. Not only will you pay a lower interest rate and not require a cosigner, but you’ll also be able to deduct the interest paid on your taxes and defer payments until after you’ve left school.
Should I start building my credit if I’m eligible for federal loans?
As an adult, you’ll need good credit for many things, including getting an apartment and a cell phone, as well as getting approved for a credit card or car loan. Generally, credit is built using a credit card, but due to the Credit CARD Act of 2009, you likely won’t be able to get a credit card to start building credit until you’re 21 without a cosigner. The exception to this: if you make a full-time income while attending school.
If you choose not to get a cosigner, you can get a secured credit card or ask a family member with good credit to add you as an authorized user on one of his or her oldest cards. Secured credit cards are backed by a cash deposit usually equal to the card’s credit limit, so the bank doesn’t incur risk. Here are some of our favorite secured credit cards.
As an authorized user, you’ll have the power to make charges on a credit card — provided the primary cardholder gives you a card — but aren’t responsible for the payments and can’t make changes to the account. If you choose to go this route, decide on a monthly spending limit with the primary cardholder and don’t exceed it. Also, have the primary cardholder contact his or her issuer to ensure that authorized users are reported to the credit agencies.
Bottom line: You don’t need good credit to get federal student loans, but you’ll need good credit or a cosigner if you need private loans. Regardless of which types of loans you go for, make sure you start building your credit for everything else you need credit for — like apartments, cell phones and car loans.
College students studying image via Shutterstock