First, a quick overview of financial aid programs. U.S. Federal funded financial aid is generally made up of the following programs

• Grants
• Scholarships
• Work
• Loans

Only the loans are going to impact credit scores. Financial aid packages have 3 types:

• No Loan Financial Aid
• No Cap Financial Aid
• No Loan Cap Financial Aid

No loan packages are fairly new. The university replaces the loan portion with grants and thereby lowers the debt load on the student. While some critics love these packages, others criticize them for being tough on colleges with lower endowments forcing them to admit fewer poor students.  That debate aside, these are likely to help students manage their credit better.

No cap packages place a cap on the loan amounts, often on a per year basis. Typically, schools will cap the loan amount to $2500 to $4000/per year, but it can vary. Again, this is done to lower the burden to students, and the intention is that the endowments will pay for shortfalls.  This type of financial aid also helps a student’s credit by capping the loan amounts

The two places where student loans and financial aid interact with credit scores are:

1. Credit inquiries. Some student loans check the parent’s credit score so they want to be aware of the timing of applying versus other credit needs.
2. Payment History.  Upon finishing college, your student loan payment history is reported and reflected in the credit score.

Check out the other student loan related episodes to learn more about how credit scores can be impacted.

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Financial Aid and Credit Scores – Episode #66