My daughter received some financial aid for her freshman year of
college but we still had to take out a sizable loan for the rest. She
applied for a loan her sophomore year and was denied because we have
"insufficient income" to repay the debt. My husband is self-employed as
a landscaper and it was a bad year. She was attending a private
college and had to quit because we couldn't get the loan. If she
attends a state college do you think she'll get a loan? Our credit is
pretty good. Is there a starting income level that you need to have to
get a loan?
— Andi W.
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that was denied because of insufficient income was a private student
You should always borrow federal first, as federal education loans are
cheaper, more available and have better repayment terms. Federal
education loans have fixed interest rates, while most private student
loans have variable interest rates. The interest rates are fixed at
6.8% for an unsubsidized Stafford loan (lower for a subsidized
Stafford loan) and 7.9% for a Parent PLUS loan. The current interest
rates on private student loans may be lower for borrowers with
excellent credit, but the interest rates are variable and are likely
to increase significantly over the next few years, ultimately costing
more over the life of the loan.
Federal education loans do not depend on credit scores or
debt-to-income ratios. Your income level does not affect your
eligibility for a federal education loan. You can qualify for federal
education loans regardless of whether you are poor or wealthy. The
unsubsidized Stafford loan and the PLUS loan do not depend on
The federal Stafford loan, a student loan, does not consider your
credit history or income at all. You can have subprime credit and no
income and still get a Stafford loan. Annual loan limits on the
Stafford loan vary from $5,500 to $7,500 for a dependent student and
from $9,500 to $12,500 for an independent student, depending on year
in school. Cumulative loan limits are $31,000 for a dependent student
and $57,500 for an independent student.
The federal Parent PLUS loan, a loan for parents of dependent
undergraduate students, has a modest credit
check. Borrowers must not have an "adverse credit history". An adverse
credit history is defined as having had a bankruptcy, foreclosure,
repossession, tax lien, wage garnishment or default determination in
the last five years, or a current delinquency on any debt of 90 or
more days. Parents may borrow up to the full
cost of attendance each year, minus other aid received. There is no
cumulative limit. If a parent is denied a Parent PLUS loan, the
student becomes eligible for the increased Stafford loan limits
available to independent students. Parents who are denied a Parent
PLUS loan also have the option of getting a creditworthy endorser or
reapplying after they no longer have an adverse credit history (i.e.,
by making payments to eliminate any 90-day delinquencies or by getting
inaccurate derogatory information removed from their credit history).
Private student loans usually require the borrower to be creditworthy
or to have a creditworthy cosigner. More than 85% of all funded
private student loans have a cosigner. Eligibility is typically
based on the higher of the borrower's and cosigner's credit
scores. The credit score also determines the interest rates and fees,
with a higher credit score yielding a lower interest rate and/or lower
fees. The stated minimum credit score on most private student loans is
currently 650, as "recourse loans" to borrowers with subprime credit
scores were eliminated during the credit crisis. In practice, however,
many lenders seem to be requiring a minimum credit score of 750-780.
Lenders have also modified their use of automated underwriting for
private student loans. Before the credit crisis one could get
automatic approval or denial for a private student loan within
minutes. Today the loan denials are immediate, but in most cases the
approvals will be subject to "secondary confirmation" where the credit
history is reviewed by a person before the loan is approved. Common
criteria for rejecting a loan application despite a good credit score
include minimum income thresholds, volatile income and self
employment. Minimum income requirements typically vary from $18,000 to
$25,000, but debt-to-income thresholds may implicitly require a higher
minimum income threshold due to higher debt. The lenders sometimes
consider total debt outstanding, year in school, degree program and
field of study. Some lenders have considered the college's default
rate on federal education loans when deciding whether to approve
private student loans for students at the college.
Federal education loans are obtained through the college's financial
aid office. Private student loans are obtained directly from the
lender. Some colleges have lists of recommended lenders, which are a
good starting point. There are also several
loan comparison sites
for private student loans.
It is worthwhile to shop around for a private student loan, as each
lender's policies and rates are different.