Do Federal Loans Look at Your Credit Score?
Understand when federal student loans consider your credit history and how different loan types are assessed for eligibility.
Federal student loans serve as a primary financial resource for many individuals pursuing higher education, covering tuition, fees, and living expenses. These loans are designed to make college more accessible by providing funding with generally favorable terms. A common question among prospective students and their families centers on whether their credit history will influence their eligibility for these federal programs. The consideration of credit varies significantly depending on the specific type of federal loan being sought, a distinction important for understanding the application process.
Federal Loans That Do Not Use Credit Scores
Many federal student aid options do not involve a review of an applicant’s credit history. Direct Subsidized Loans and Direct Unsubsidized Loans, for instance, are generally available to eligible students regardless of their credit standing.
Eligibility for a Direct Subsidized Loan is primarily based on demonstrated financial need and enrollment in an eligible program at least half-time. The U.S. Department of Education pays the interest on these loans while the student is in school, during a grace period, and during periods of deferment.
Direct Unsubsidized Loans are accessible to both undergraduate and graduate students, with no requirement to demonstrate financial need. For these loans, interest begins to accrue from the moment the funds are disbursed, even while the student is still in school.
The absence of a credit check for these widely available federal loans reflects their purpose of providing broad access to educational funding. Federal Pell Grants, which are forms of aid that do not require repayment, also do not consider an applicant’s credit history.
Federal Loans That Use Credit Scores
While many federal student loans do not involve a credit check, Direct PLUS Loans are an exception. These loans, which include Parent PLUS Loans for parents of dependent undergraduate students and Grad PLUS Loans for graduate and professional students, require a credit check as part of the eligibility determination.
The purpose of this credit check is not to assess a traditional credit score, but rather to determine if the applicant has an “adverse credit history.” An adverse credit history, for federal loan purposes, is defined by specific negative financial events rather than a numerical score.
This can include having one or more debts with a total outstanding balance greater than $2,085 that are 90 or more days delinquent as of the credit report date. It also encompasses debts placed in collection or charged off within the two years preceding the credit report, if their combined balance exceeds $2,085. Additionally, events such as bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or a write-off of federal student aid debt within the five years prior to the credit report can constitute an adverse credit history.
Addressing Adverse Credit History
If a Direct PLUS Loan applicant is found to have an adverse credit history, there are still pathways to potentially qualify for the loan.
One option is to obtain an endorser, who is similar to a cosigner on other types of loans. An endorser agrees to repay the PLUS Loan if the borrower fails to do so and must not have an adverse credit history themselves. The endorser will undergo their own credit check as part of this process.
Another avenue involves documenting extenuating circumstances related to the adverse credit events. This requires providing evidence to the U.S. Department of Education that the negative financial events were caused by unforeseen situations, such as a medical emergency or natural disaster, or that the information on the credit report is incorrect.
If a borrower qualifies for a PLUS Loan through either an endorser or by documenting extenuating circumstances, they are also required to complete PLUS Credit Counseling. This counseling session provides important information about the obligations associated with the PLUS Loan and repayment responsibilities.