Fall is an exciting time for college-bound students, but many relying on student loans to finance their education should make sure their credit score is high - otherwise they may not secure a loan.
Tuition is getting more expensive each year, especially as state funding and private donations to colleges have been drastically reduced as a result of the recession. The economic downturn has also filtered down to most families, eating up their savings and, in some case, forcing them into unemployment, foreclosure or bankruptcy. This has led many college-bound students to find a way to pay for their education and most will be taking out student loans.
But what many students and parents alike may not know is that some types of loans - similar to other lines of credit like mortgages and auto loans - place importance on the applicant's credit score. This is not true for all loans, especially most provided by the federal government. For example, Stafford, Perkins and PLUS loans do not use an applicant's credit score as a determining factor in extending financing, according to student loan education website FinAid.org.
However, the PLUS loan - which is a loan that parents take on to send their children to college - does require that applicants not have an "adverse credit history," the website reports. Payments that are 90 days overdue or Title IV debt - resulting in repossession, foreclosure, bankruptcy, lien, wage garnishment or write-offs - in the past five years may remove a parent from loan eligibility, the website noted.
Private student loans, in contrast, do make determinations on whether to extend a loan to a borrower based on their creditworthiness. In addition to the borrower's credit score, lenders may also take their debt-to-income ratio and recent legal proceedings related to debt settlement into consideration, FinAid said. A recent report in Investopedia encourages both students and parents to pull their credit reports and find out what their credit score is prior to meeting with a loan officer.
Even if students are planning on applying solely for federal student loans, it is still a good idea to view their credit score and make sure there are no inaccuracies. In the event that they do not receive sufficient aid to cover their college expenses, they may be forced to apply for a private student loan and having a clean, accurate credit report will expedite the application process.