Does My Credit Score Impact My Student Loan Interest Rate?

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Ben Luthi

By Ben Luthi

May 4, 2020

Your credit score is an important aspect of your financial life because it provides a snapshot of your overall credit health. 

When you apply for a credit card or most loans, your credit score is an essential factor that lenders consider to determine whether or not to extend you credit and what interest rate to charge you. 

When it comes to student loans, however, the impact your score has on your interest rates depends on the type of student loan you’re applying for.

How Your Credit Score Impacts Federal Student Loan Rates

If you’re applying for a federal student loan, your credit score has no bearing on your interest rate at all. That’s because Congress sets interest rates once per year, and the U.S. Department of Education offers the same interest rate to everyone who qualifies for a loan.

In fact, for most federal loans, the Department of Education doesn’t even run a credit check. This arrangement makes it easier for college students who haven’t had a chance to establish a credit history still get the financing they need.

With Direct PLUS Loans, which are offered to graduate students and parents, there is a credit check requirement. However, the Department of Education reviews your actual credit report instead of your score to look for anything that constitutes an adverse credit history.

If there’s anything on your report that’s concerning, you may not get approved for a loan. If you do get approved, however, your interest rate will be the same as anyone else’s.

How Your Credit Score Impacts Private Student Loan Rates

Federal student loans are preferred over private student loans because of the better benefits, including income-driven repayment payment, any federal forgiveness programs, generous deferment options, subsidized loans, and a death and disability discharge. Refinancing federal loans into private loans means the loss in these benefits.

Whether you’re applying for a private student loan or trying to refinance your existing loans with a private lender, your credit score has a significant impact on your interest rate.

That’s because private lenders use what’s called risk-based pricing to determine interest rates. In other words, the more of a risk you pose to a lender, the higher the interest rate you’ll pay on the loan. 

In addition to your credit score, lenders will also look at your credit report, income, other debts and more to determine how much you pay. 

As a result, many college students may find it challenging to get approved for private student loans on their own, and recent college grads may have a hard time refinancing their loans affordably. 

How to Score a Lower Interest Rate on Student Loans

To improve your chances of getting a low interest rate on your private loans, you may have a creditworthy cosigner apply for the loan with you. If you don’t have that option, however, here are some ways you can improve your credit score:

  • Get caught up on all past-due payments, if applicable, and pay all your bills on time going forward
  • Keep your credit card balances relatively low
  • Avoid applying for credit unless you absolutely need it
  • Get added as an authorized user on a family member’s credit card — if it has a positive history

This process can take time, but the savings can be well worth the effort.



A good place to start:

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