Denied for a Private Student Loan, Now What?

There are a lot of factors that lenders take into consideration when deciding whether or not you qualify for a private student loan. These include:

  • Proof of income
  • Employment history
  • Credit history
  • Enrollment status

One of the largest roadblocks to paying for college is confusion. There are a lot of options out there, and it can be difficult to navigate them. It can be especially disheartening when you’ve been denied for a loan that you were counting on. But a denial doesn’t mean game over. Here are some tips on dealing with this unexpected situation.

Start with Federal Student Aid

(I know, you’re looking for tips on private student loans, but bear with me.) The Free Application for Federal Student Aid (FAFSA) can seem daunting, but applying for financial aid should be your first course of action when it comes to paying for college. The FAFSA will determine if you qualify for grants (you don’t have to pay these back), in addition to part-time employment (i.e. federal work study) and loans. Not only are federal student loans issued by the government, and come with provisions that only the federal programs provide ─ such as generous deferment and forbearance options ─ but they are issued based on information provided on the FAFSA. Also, some colleges and universities look at your FAFSA when determining eligibility for grants that are issued by the school itself.

If you were counting on private student loans to fill in your funding gaps, and did not fill out the FAFSA, you might be leaving free money on the table. Many middle-income households think they won’t qualify for grants, but this simply isn’t always the case. So, regardless of how you thought you were going to pay for school, filling out the FAFSA is a good idea.

Bonus: If you are the student, your credit history, or lack of, is not taken into consideration. (Exception: Grad PLUS Loans do require a credit check.)

Denied Due to Insufficient Credit

It may seem crazy to think that having little to no credit history can count against you. After all, it’s not like you’ve borrowed money and haven’t paid it back. The problem here is that when private lenders are looking at loaning you thousands of dollars, they want to be sure you can pay it back, and when you don’t have any credit history at all, they don’t have any way to gauge the risk. It may feel like you’re being penalized for lack of experience, but it’s understandable that private lenders want to make informed decisions.

Now here’s the good news. There are a few lenders that offer private student loans that do not require an extensive credit history. In some cases, you may not even need a cosigner. These programs include:

Of course, you can always apply for a loan with a creditworthy cosigner (such as a parent/aunt/uncle) which will greatly increase your odds of getting approved. And you won’t be alone. According to a study by Measure One, roughly 94% of all undergraduate students who borrow a private loan do so with the help of a cosigner.

Denied Due to Poor Credit

What if you do have a credit history, but it’s not so great?

An overdue utility bill or a late credit card payment may not seem like that big of a deal, but that is all it takes to get a negative item on your credit report. Negative items can show up quickly and stay on your credit report for up to seven years. That unpaid electric bill from your first college apartment may come back to haunt you when you apply to graduate school. That late credit card payment from three years ago might be the difference between approval and denial when it comes to the private student loan you were hoping for.

If you find yourself in this situation, a cosigner might be the route for you. A cosigner with a solid work history and excellent credit can offer reassurance to a lender that the money loaned will be repaid. Just remember that a cosigner is equally responsible for repaying the loan as the student. Either party can be held accountable for the entirety of the loan.  

Robert Farrington, founder of TheCollegeInvestor.com, offers this advice, “If you're a family that needs to take out private student loans and you are cosigning the loan, you should also take out a life insurance policy on the student. ... That way, if anything does happen, the (surviving) cosigners will have financial support to cover the debt.”

Denied Due to Lack of Income or Employment History

This may seem self-explanatory, but it is important to emphasize the following. Student loans are not backed by your assets (like a home, for example). If you are unable to repay your debt for some reason, your lender cannot come after you and repossess your knowledge. When you think about home loans or auto loans, there is something tangible at stake that can be claimed in the event you fail to repay your debt. Private student loans are much more similar to personal loans which are based on your past credit history and your current ability to repay your debt—as demonstrated by a steady income and employment history.  So when student loan lenders are looking to take a risk on you, they are doing so based mostly on your track record. If you don’t have a track record of employment and no way to demonstrate you have money coming in the door to repay the loan, lenders  are not likely to take the risk. Sure, one day you’ll be reeling in the dough. But the promise of future income is not enough for most lenders to take a big chance on you.

The best thing you can do in the short-term is

1) ask for a cosigner to help you out and

2) work toward building your credit history while you’re in college.

What to do if you’ve been denied a private student loan? Try these tips:

  • Check your credit report. Do you have negative items on your report? Is it accurate? Are you too far in debt? If you’ve been denied, understanding why can help you fix the situation.
  • Pay any outstanding bills. Taking care of any potentially negative information is a good way to start cleaning up your credit history.
  • If you were denied by a national lender, appeal the decision. Loan appeals are evaluated on a case-by-case basis. Loan applications that were denied due to cases such as temporary credit issues due to divorce, disputed credit records, medical emergencies, temporary job loss or poor credit due to natural disaster, may be reconsidered if you file an appeal with the lender.
  • Find a creditworthy cosigner. If you’re committed to your education, look for someone who would like to help you achieve your goal.

Need more information on good credit and cosigners, including how to ask someone? Check out these articles.

https://www.edvisors.com/college-loans/terms/cosigners/

https://www.edvisors.com/ask/faq/how-to-find-a-cosigner/

What to do next

Learn more about:

Private Student Loans

Student Loan Consolidation