Your Credit & Your B-School Financing

The message regarding financing your graduate business degree with student loans should be clear: The majority of students find the investment worth it, and the majority who need student loans are able to find them.

Some students will be able to secure enough loan assistance through the Federal Stafford Loan, with one or a combination of the Subsidized Stafford and the Unsubsidized Stafford—neither require a strong credit history).

Borrowers applying for either Grad PLUS or private education loans will find that their credit history will have an impact on their ability to borrow. Remember: It is important to understand the difference between being “Credit Ready” and “Credit Worthy”.

• Grad PLUS Loans are based on a borrower’s total Cost of Attendance (COA)—eligibility is determined based on total COA minus other financial aid, including Federal Stafford Loans.
• Grad PLUS Loans are based on a borrower being Credit Ready, meaning the borrower has a satisfactory credit history and does not show adverse items in their credit history such as, for example, 90-day late payments or unpaid collection accounts.
• The interest rate and fees for Grad PLUS Loans are not determined by a borrower’s credit history (they are mandated by the federal government, since they are federal loans), but this will be irrelevant if the borrower cannot qualify based on his or her credit.

Borrowers denied eligibility for a Grad PLUS Loan because of their credit may want to contact their lender regarding the option of an “Endorser” for their Grad PLUS Loan—the lender may offer a credit repair service, as well.

Private education loans are similar to Grad PLUS Loans in that they are usually based on a borrower’s total COA less other financial aid (the possible exception: a private education loan applied for outside the Financial Aid Office).

Unlike Grad PLUS Loans, private education loans are also based on a borrower being Credit Worthy—this can affect not only loan approval, but also how much they pay for the loan. In a nutshell, the better your credit history, the more likely you are to be approved for a private education loan with lower fees and a lower rate.

For example, someone with an excellent credit history might be approved for a private education loan with a 1% origination fee and a variable interest rate of LIBOR plus 2%, while someone with an acceptable but not outstanding credit history might pay 3% in origination fees with an interest rate of LIBOR plus 6%.

Some lenders have recently withdrawn from the student loan market – some for federal loans, some for private, and some for both. In general, tighter credit markets have adversely impacted lenders’ ability to secure additional financing for new loans, which is often done through the sale of existing loan portfolios that are bundled together or “securitized”, and this has impacted student loan lenders.

The good news is that not only are there still enough lenders making student loans for you to have a choice, the federal government has recently approved and started implementing a program designed to help ensure a steady funding source for this year and next.

However, there is a word of caution. As referenced in the section on Private Education Loans, lenders have increased their eligibility requirements for students who apply for private loans, and have also increased their fees and interest rates for some borrowers whose credit is acceptable but not excellent. Some students whose credit history are suspect may need to apply with a creditworthy cosigner.

In summary:

• Your credit history may impact both your access to and cost of some student loans
• Grad PLUS Loans are based, in part, on your being “Credit Ready”, requiring just the absence of negative credit
• Private education loans are based, in part, on your being “Credit Worthy”, requiring the existence of positive credit
• Graduate business students have a sound record of both willingness and ability to pay back their student loans
• You may need a creditworthy cosigner for a private loan if your credit history is unsatisfactory or you want to reduce your loan’s cost
• The stronger your credit, the lower your fees and interest rate will be on private education loans