Poor Credit? Should You Apply for a Personal Loan?

Leverage Personal Loans to Your Advantage

If you are considering college, there is a good chance that you’ll need some help with financing.  And like many college-aged applicants, you may not yet have much of a credit history. The best alternatives, for student-borrowers, are low interest fixed-rate student loan products maintained by the Federal Government.

The Department of Education administers wide-ranging student assistance initiatives, each designed for particular student groups.  Today, loans are issued through the William D. Ford Federal Direct Loan Program.  The agency, which acts as its own lender, assists undergraduates and graduate-level students.  Many programs are general in scope, assisting students from diverse backgrounds, who are pursuing a variety of academic credentials, while other initiatives target those students entering certain fields.

Federal loans are offered as subsidized, and unsubsidized assistance, each carrying unique conditions.  Subsidized options contain attractive features, which allow borrowers to remain interest-free while they are attending college.  The Federal Government pays each qualified participant’s interest during school, and also during other periods over the course of a loan.

Unsubsidized loans are not underwritten in the same way as their subsidized counterparts.  Instead, students agree to pay interest, or allow it to be capitalized, during the entire life of the loan – regardless of higher education enrollment status.  Additional government loans are offered to graduate students, and to parents who wish to borrow independently, in support of their children’s education.  PLUS Loans provide valuable resources for independent borrowers who have proven credit histories.  Without a solid track-record of successful credit relationships, borrowers may be required to add cosigners to the effort, in order to access loans.

Individual states supplement federal borrowing opportunities, with their own local lending programs.  Student assistance efforts vary across states, so inquiries are best directed toward individual Departments of Higher Education.  State-specific aid fills gaps left by large-scale federal programs.

Private, alternative loans exist for student-borrowers who need additional funding, beyond that which is extended by federal, and state, financial aid systems.  Because they are maintained by for-profit lending institutions, private, personal loans carry higher interest rates than federal loans, and repayment terms may not contain the flexibility offered in government-sponsored plans.  Whenever possible, keep your student debt low, by utilizing grant programs and earning merit-scholarships. When borrowing is required, consider using personal loans to meet unmet college expenses.

FAFSA and Direct Loans

In order to apply for federal student loans, you will need to submit the Free Application for Federal Student Aid (FAFSA). The standardized financial aid request gathers family data, so financial aid administrators can accurately assess the college funding needs of each applicant.  Grants, and other assistance are provided, based on information submitted to the Department of Education, on the FAFSA application.  Once these gift-resources are exhausted, applicants are considered for participation in the Direct Loan Program.

Direct Subsidized Loans are issued to students exhibiting financial need, and are currently made available with fixed interest rates of 3.4%.  Unsubsidized options, which are offered without regard for financial need, carry fixed interest rates of 6.8%, which remain the responsibility of student-borrowers throughout the life of the loans.

Borrowing is limited to the actual cost of attendance, minus additional aid received.

Perkins Loan

The Perkins Loan program is administered differently, in that borrowed funds are obtained directly from participating colleges and universities. The purpose of the loan program is to provide assistance for students that have the highest levels of financial need.

Colleges maintain revolving accounts, with the help of the Federal Government, which provide pooled resources for low-income applicants.  Funds are limited, and issued at each school’s discretion.  Interest rates are 5%, and students are encouraged to apply early, for these limited opportunities.

Grants and Scholarships

In addition to loans, grants and scholarships help large numbers of students meet college expenses.  The gift-aid funding provided by need-based grant programs, and merit-based scholarship initiatives does not require repayment, so these are highly competitive forms of student aid.

Pell, and other large-scale programs are offered without credit checks, or high performance standards.  Scholarships, on the other hand, reward outstanding achievement, in areas like athletics, academics and community engagement. High test scores, good grades and extra-curricular participation are common eligibility requirements for merit-scholarships, but each award carries unique standards.

Because these resources are gifts, they play important roles in managing post-graduate debt. Students considering personal loans are always encouraged to deplete other resources first, before entering into loan agreements that add to long-term debt.

Loans, Scholarships and Your Academic Major

Vocations recruit talent from universities, and support educational programs for professionals entering certain fields. Subject-specific assistance is granted in all academic areas, but certain disciplines receive extra attention from scholarship organizations and granting agencies.  Professions experiencing personnel shortages, like teaching and nursing, are excellent study paths for aid-seekers entering college. Other health care positions are also wanting for qualified staffers, so technicians, medical assistants and other specialists also benefit from special financial aid incentives.

Tuition-for-service agreements are offered, for professionals willing to commit to working in critical shortage areas, following graduation from undergraduate programs.  Several thousand dollars worth of tuition payments are earned for each year of service that is provided in high needs areas.

Private Loans

Unlike government-backed lending initiatives, securing private, personal loans require applicants to submit to credit checks.  Adverse entries, like late payments and previous defaults are obvious disqualifiers, but even students with very little history of borrowing do not make grade. As a result, most college-aged borrowers entering the private student loan industry apply with credit-worthy co-borrowers.

By adding an individual with more substantial credit, students provide additional assurance that loans will be repaid.  For cosigners, the agreement is not to be taken lightly, because responsibility for repayment is shared by all signatories.  On the other hand, when student debt is managed effectively, it bolsters the credit ratings of each borrower. Once a designated number of on-time payments are made, many lenders release cosigners from responsibility for their loans.

Manage Your Debt

Managing student loans, whether public or private, is essential to future credit success for student-borrowers.  Defaulting on repayment is not an option, so every possibility should be explored before this occurs.

The Federal Government provides generous repayment schedules, designed to accommodate a wide variety of post-graduate employment scenarios.  Fixed plans, graduate plans, and income-sensitive repayment options provide several alternatives to default.  Consolidation is another option for some borrowers.  For individuals with more than one outstanding student loan, consolidation allows them to be combined under a single repayment umbrella – often resulting in better terms for borrowers.

Depending on the conditions attached to the original loans, consolidation has the potential to lower interest rates, extend repayment periods, and reduce monthly payments.