The credit score you need for the best rate on a private student loan


If you're considering refinancing student loan debt or taking out private student loans to pay for school, your credit score is important.

When you're borrowing federal direct student loans as an undergraduate, your credit score doesn't matter. But if you need to take out private student loans — something about 14% of undergraduates do — the lender will consider your credit history and credit score as part of the application.

Lenders will also review your credit if, after you graduate, you apply to refinance some of your student debt, a move that bundles one or more of your federal or private loans into one new private loan with a single interest rate.

Aim for a score of at least 750

You'll need a credit score of at least 750 to get the best rate on a private student loan, says Betsy Mayotte, president of The Institute of Student Loan Advisors. That rate is currently about 2.5%. You may still be able to qualify for a loan with a score as low as 650, but your interest rate will be much higher — in the range of 8% or 9%, she says. Some private student loan providers charge rates as high as 14%.

The steep rate jump is because lenders take a bigger risk offering private student loans to borrowers with low scores, says credit expert John Ulzheimer, who has worked for FICO and Equifax. Unlike a home or auto loan, there's no asset they can claim if you don't pay. "Lending 101: Don't let someone borrow money if you don't expect them to pay it back," he says.

The problem is that students and recent grads tend to have lower credit scores, mostly because you're young and don't have an established credit history. The average credit score for people age 20 and younger is 631, and for those ages 21 to 34, it's 634, according to WalletHub.

How much money you can save with a better score

Let's say you take out a $5,000 private student loan for your freshman year, and start a 5-year repayment term 4.5 years later — after you graduate and enjoy a 6-month grace period. (Private student loans accrue interest while you're in school as well as during your grace period after graduating.)

At a fixed 8% rate, the balance would be almost $7,200 when you start repayment. With a fixed 2.5% rate, you'd only owe about $5,600.

In all, the better rate would save you almost $2,800 in interest over the life of the loan.

Consider a cosigner to get a better interest rate

If your score isn't good enough to get a decent rate on a private student loan, one strategy is to ask someone with an established credit score and history, often a parent, family member or trusted friend, to cosign. Using a cosigner is a common move: publisher Mark Kantrowitz estimates around 90% of undergraduate private student loans require one.

But cosigning can be risky for that family member or friend with good credit. Essentially, you're asking them to lend you their good reputation to bolster your application. If you pay late or fall behind on what you owe, lenders can go after the cosigner, says Michael Kitchen, managing editor for Student Loan Hero.

He warns would-be cosigners: "You're taking the same risk as the same person borrowing the loan takes."

More from Grow:

acorns+cnbcacorns cnbc

Join Acorns


About Us

Learn More

Follow Us

All investments involve risk, including loss of principal. The contents presented herein are provided for general investment education and informational purposes only and do not constitute an offer to sell or a solicitation to buy any specific securities or engage in any particular investment strategy. Acorns is not engaged in rendering any tax, legal, or accounting advice. Please consult with a qualified professional for this type of advice.

Any references to past performance, regarding financial markets or otherwise, do not indicate or guarantee future results. Forward-looking statements, including without limitations investment outcomes and projections, are hypothetical and educational in nature. The results of any hypothetical projections can and may differ from actual investment results had the strategies been deployed in actual securities accounts. It is not possible to invest directly in an index.

Advisory services offered by Acorns Advisers, LLC (“Acorns Advisers”), an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Brokerage and custody services are provided to clients of Acorns Advisers by Acorns Securities, LLC (“Acorns Securities”), a broker-dealer registered with the SEC and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Acorns Pay, LLC (“Acorns Pay”) manages Acorns’s demand deposit and other banking products in partnership with Lincoln Savings Bank, a bank chartered under the laws of Iowa and member FDIC. Acorns Advisers, Acorns Securities, and Acorns Pay are subsidiaries of Acorns Grow Incorporated (collectively “Acorns”). “Acorns,” the Acorns logo and “Invest the Change” are registered trademarks of Acorns Grow Incorporated. Copyright © 2019 Acorns and/or its affiliates.

NBCUniversal and Comcast Ventures are investors in Acorns Grow Incorporated.