If you have no credit history or a poor credit score then getting a college loan might not be easy. But, if you can get somebody suitable to act as a cosigner and guarantee the repayment of your loan then this can certainly help considerably in securing a loan.
College students frequently have few if any credit cards, no car loans and seldom have a home mortgage loan so that they simply have little or no credit history against which to assess the risk in giving them a loan. In addition, where students have a credit history it is all too often relatively poor because, as with a lot of us in our youth, they have made some hasty decisions and overreached themselves so that they ran into problems making their repayments.
Either way the lack of any credit history or problems with late repayments and possibly defaulting on loans will frequently place a student into a high risk category as far as the majority of lenders are concerned. This means that loan officers, which includes those taking decision on behalf of the government's Federal student loans programs, will frequently process applications from such students with care. In many cases loan applications will be denied or, in some instances, loans will be granted but a high interest rate will be applied to balance the risk and to compensate for increased default rates.
One method of counteracting the lack of any credit history or a poor credit record is for students to use a cosigner for their application for a loan. In many cases this will be one of the student's parents and loan officers will consider the parent's credit history when deciding whether to approve a loan.
In these circumstances it is the parent's credit history which becomes the primary factor in fixing the interest rate to be charged and parents with a superior credit history will typically get the best rates, whilst parents with lower credit scores will frequently pay a high rate. The difference could appear small at first glance but can in fact add up to a considerable sum over the standard loan repayment period of 10 years.
For example, one popular loan program provides loans at 4% for borrowers with a good credit score rising to 6% for people with a poorer but still adequate record. This 2% variation might not seem like much but could represent more than $5,000 over the life of a normal loan.
It is not at all uncommon these days for students to require as much as $100,000 to finance an undergraduate education and, even where interest is paid from the beginning rather than being accumulated, interest at the current Stafford loan rate of 6.8% is nearly $567 each month or $6,600 every year. Lowering the interest rate to 5%, which is the current rate for a Perkins loan, reduces these figures to $417 and $4,820.
It should also be remembered that these numbers assume that repayment starts straight away. It is however much more usual for repayment to be deferred until six months after leaving college and this will increase these numbers considerably.
Students with a cosigner with a good credit record can not only improve their chances of getting a loan in the first place, but can also lower their total loan repayment significantly.
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