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Advice on credit rating when applying for student loans

Mark Cappel
UpdatedOct 31, 2007

Will a foreclosure or bankruptcy affect you negatively when trying to obtain a student loan?

Will a foreclosure or bankruptcy affect you negatively when trying to obtain a student loan? What if you have good credit except for that 1 blemish?

Thank you for your question about your credit rating and student loans. Exactly how a foreclosure or bankruptcy will affect your ability to obtain a student loan will depend on the type of student loan you are attempting to borrow.

There are two primary types of loans available to students: federally insured student loans and private student loans. Federally insured student loans, such as Stafford, Perkins and PLUS loans, are provided by your school or by a private lender, but the loans are guaranteed by the federal government, meaning that the government will repay the lender if you default on your loan. Private student loans, on the other hand, are not insured by the government, so the lender is taking on the full risk of lending the money when it extends the loan. If you default on a private student loan, the creditor would be responsible to trying to collect on the delinquent loan balance; if you cannot to afford to repay the debt, it is possible that the lender would never be paid.

Your credit rating is not an issue when you are applying for federally insured student loans. These loans are primarily based on need, not on your past credit performance. Since these loans are guaranteed by the federal government, the lenders are not taking any risk in extending these loans. The Department of Education insures these loan programs for this very reason; they want to make higher education loans available to all students regardless of their credit history and current financial situation. In order to apply for federal student loans, you would need to first complete the Free Application for Federal Student Aid (FAFSA). This Web site also provides a wealth of information regarding federally insured student loan program and the different borrowing and repayment options available to students. If you are interested in applying for federally insured student loans, you should also discuss your options with your school's financial aid office. In general, it is best for students to max out their federally insured loan options before considering other loan options, such as private student loans, since federal student loans generally offer lower interest rates and better repayment terms than most private loan programs.

If you find that scholarships and federally insured student loans will not provide you with enough money to fund your educational goals, you may want to consider private student loans. Unlike federally insured student loans, banks make lending decisions for private student loans based on the borrower's past credit performance. A foreclosure or a bankruptcy appearing on your credit report would almost certainly make obtaining a private student loan very difficult. Even if your credit is good otherwise, a foreclosure or bankruptcy is a serious negative mark on your credit report, and would likely lower your credit score significantly, especially if the foreclosure or bankruptcy occurred relatively recently. Even if you do not qualify for a private student loan based on your own credit rating, a friend or relative with better credit may be able to help you obtain a loan by cosigning the note. For more information about private student loans, you should visit

See the resource Student Loan Payment for a more detailed discussion of these issues. If you are disabled and are paying a federal student loan, see the resources Student Loan Disability and Federal Student Loan Tuition Waiver. If you work in public service and have federal student loans, read Public Service Loan Forgiveness to learn how to have your student loans waived. To learn more about student loans, I encourage you to visit the Student Loan Resources page.

I hope that the information I have provided helps you Find. Learn. Save.