Which Comes First, The Student Loan or the Credit Score?

 Which Comes First, The Student Loan or the Credit Score?

Financing post-secondary education is an overwhelming experience. The naive student gets thrown into an adult world of choices. One choice with serious impact is the effect of borrowing money that builds credit history. Credit history creates a credit score that can be used to determine employment status, home and auto loans, mortgage rates or rental feasibility. Credit affects the life of a college education before, during and after enrollment.

First, what is a Credit Score?

A credit score is a number between 300 and 850 that reflects a borrower’s creditworthiness. This number is published by the Fair Isaac Corporation (FICO) and is used by three credit bureaus; Experian, Transunion and Equifax. The higher the number the better, and more likely they are to qualify for lower interest loans and/or credit cards and lower premium on auto and home insurance. Nearly 80% of 18-19 year olds begin college without a credit score.

Only Use Cash

Paying cash for Post-Secondary education seems like a responsible thing to do. The reality is that 70 percent of 2013 college graduates entered the workforce with an average $28,400 in debt. This means that seven in ten students will, or have built, a credit history without knowing anything different. This percentage is increasing. Although leaving college with debt is scary, a good education is a financial investment. If paying with cash is a tougher than planned for, consider consulting with a financial advisor or personal banker for the best options.

When does Credit Score Affect School Funding

An initial look into financing college begins with the Free Application for Federal Student Aid (FAFSA) through the U.S. Department of Education. When an applicant meets eligibility guidelines, The FAFSA application reviews the household financial statements and computes need-based aid they are willing to borrow to the student for the upcoming year. Financial assistance is broken down into loans, grants and/or work study programs available through the federal government for the tuition of the college enrolled. Grant and work study programs offer financial aid without needing to be repaid as long as enrolled for full term of the program. Any unused portion due to withdrawal from school will need to be refunded. The remainder of assistance will be covered by loans, although the total amount of federal loans may not cover all the tuition.

Federal Loans

Federal Loans are approved borrowing to a student based on results from the FAFSA report. The two loan options are Stafford and Perkins. Both loan programs offer funding for school; tuition,  board, and other school charges, however the terms of the loans differ greatly.

  1. Stafford Loan – Stafford loan is a monetary amount awarded by the Federal Government to pay for school. This award is granted after completing the FAFSA. Repayment of the loan begins 6 months after leaving the school. Coincidentally, the locked in interest rate for both options for 2015-2016 undergraduate enrollment is 4.29%, which may change independent of each other annually.

Direct Subsidized Stafford Loan – Subsidized loans are offered directly to students demonstrating financial hardship. The dependent undergraduate loan limits increase by $1,000 annually beginning with $3,500 for freshmen. The cumulative limit is $23,000. The accruing loan interest is paid by the government during school enrollment. The repayment begins 6 months after eligibility ceases. The interest rate for 2015 is 4.29%. This rate is set by congress annually.

Direct Unsubsidized Stafford Loan – Loans that are unsubsidized are accumulating interest during the loan and is added to the borrower’s monthly installments. The undergraduate loan limits increase by $1,000 annually beginning with $5,500 for freshmen. The cumulative limit is $31,000. The repayment begins 6 months after eligibility ceases. The interest rate for 2015 is 4.29%. This rate is set by congress annually.

Direct PLUS Loans – graduate or professional students and parents of dependent undergraduate students are eligible for assistance to help pay for education expenses not covered by other financial aid. The interest rate for July 1, 2015-June 30, 2016 is 6.84%.

If loan is made by a parent, payment will begin immediately following disbursement unless a deferment is requested. A monthly loan fee of 4.272% is added to the monthly repayment.

  1. Federal Perkins Loan – This loan is a monetary amount provided by the Federal Government to the participating school. The school then awards an amount to a student based on need. The interest is fixed at 5.0% and repayment begins after a 9 month grace period due to graduation, leaving school or dropping below half-time enrollment. The annual undergraduate limit is $5,500 with a cumulative limit of $27,000. Since the school is the lender, repayment will be made to the school or the school’s loan servicer.

Several repayment plans available for Federal Loans. The default repayment timeframe is 10 years but other options are available depending on the loan servicers. Monthly payments are when credit scores turn good or bad for those just starting out. A credit score is not a factor in determining what financial assistance the student is eligible for. The credit score does reflect the responsibility of borrower’s dedication to repayment.

FAFSA Covers Some of the Tuition

Currently, the Stafford and Perkins loan options have an annual and aggregate limit. When financial assistance does not cover all the tuition, fees, room and board, and other school charges, it becomes necessary to look for additional financing. Personal banking, investments, or custodial guardians may provide additional support. More than likely a student, and/or their parents, may need to take out a private student loan to cover the difference. Lenders will review financial statements, including credit history, to determine the appropriate loan to offer.  

When Credit Score Affect College Finances

Examining the post college goals is imperative when choosing the right lending institution. Since 1972, more than 30 million Americans were helped by Sallie Mae. As a college lender, they advocate consideration to the anticipated monthly payments after graduation on the total student loan debt compared to their anticipated monthly earning. This will assist the borrower when deciding what type of personal loan and repayment plan is the best option.

Qualifying for a Personal Student Loan

Personal student loans are offered by banks and credit unions offering an interest rate based on the applicant’s credit history. Remember that 80% of 18-19 year olds do not have credit history when entering college. Submitting an application for a student loan requires a credit search. If “no records found” appears, the lender uses discretion to approve a loan and it may issue at a higher interest rate. To reduce the risk of high interest loans, follow these steps to build a credit history before applying for a loan.


Obtaining a credit card access is the quickest way to establish a history. After six months of purchase and repayment, a credit score will appear. Prepare by obtaining a credit card.

  1.   Starting Credit From Scratch

Upon an eighteenth birthday, students can apply for a credit card. Temptation abounds when banks and credit unions solicit the young adults. They face a choice of credit cards that represent their purchasing habit. Flying in at every angle will be solicitations for:

Remember to verify that the solicitation is for Student Cards. A higher introductory rate is seen during the first 6 months. After establishing a good credit history, contact customer service and request a review of the account to reduce the interest rate. Asking a parent to co-sign the credit card may provide a lower initial interest rate, but the line of credit will still require 6 months to report a credit score. If an 18th birthday falls under the 6 month reporting time needed to obtain a loan, another option might be better.

  1. Authorized User on Parent Credit Card

Parents can add their child as an authorized user to an existing credit card. This provides instant access to the credit the card has built. Verify with card issuer this option is available. This option is similar to co-signing a loan, yet provides the card’s history, not the parents.

Co-Signing a Student Loan

A creditworthy cosigner is important if the student has zero credit. When looking for a co-signer, consider these factors:

  •         Greater chance of loan approval
  •         Lower rate possibility
  •         Opportunity to establish good credit history

Most often students will look to their parents for assistance, yet others may seek out a grandparent or other relative, or someone that is investing in the future. Although a co-signer may help initially, other variables need to be discussed before signing the papers. The co-signer will take a hit on their credit score. He/she is equally obligated in the repayment of the loan, but may be released depending on the lender’s restrictions. If a co-signer release is not written into the loan, or takes longer than anticipated, consider taking out a life insurance policy to protect the co-signer.

Get Advice Before Applying

Financial planning for college can be an overwhelming experience. Review current student finances and forecast post college dreams. Planning the middle part, college years, should take you from beginning to end to lessen the worry. A credit history is a large factor in setting interest rates on home and/or auto loans, credit card APR, Auto, and Home Insurance for a lifetime. Discuss financial steps with an advisor, and then consult an Insurance agent to save time and money.

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