Should you have no credit history or a poor or bad credit score then finding a college loan could be hard. But, if you are able to get a suitable person to agree to be a cosigner and to guarantee the repayment of your loan then this can certainly help a great deal in securing a loan.
College students often have few if any credit cards, no car loans and seldom have a home loan which means that they simply have no credit history against which to judge the risk in granted them a loan. Also, in those cases where students have a credit history it is all too frequently less than favorable because, as with a lot of us in our youth, they have made some irresponsible decisions and overreached themselves so that they ran into problems making their repayment obligations.
In either case the lack of a credit history or problems with late repayments and perhaps defaulting on loans will normally place a student into a high risk category so far as the majority of lenders are concerned. Consequently loan officers, which includes those responsible for taking decision on behalf of the government's Federal student loans programs, will normally handle applications from such students with care. Often loan applications will be denied or, in borderline instances, loans will be approved but a high interest rate will be charged to balance the risk and to compensate for higher default rates.
One method of counteracting the lack of a credit history or a bad credit record is for students to have a cosigner on their loan application. In the majority of cases this will be a parent and loan officers will look then at the credit history of the parent when deciding whether to approve a loan.
It is also the parent's credit history becomes the chief factor in deciding the interest rate for the loan and people with a good history will typically receive the best rates, while people with lower credit scores will generally pay a high rate. This difference could appear to be small at first glance but can in reality amount to a significant sum over the standard loan repayment period of 10 years.
As an example, one popular loan program offers loans at 4% for borrowers with an excellent credit score increasing to 6% for borrowers with a poorer but nevertheless satisfactory record. The difference of 2% may not appear to be much but can represent in excess of $5,000 over the life of a loan.
It is not unusual nowadays for students to require as much as $100,000 to fund an undergraduate education and, even if interest is paid from the beginning and is not rolled up, interest at the current Stafford loan rate of 6.8% is almost $567 every month or $6,600 each year. Lowering the interest rate to 5%, which is the present rate for a Perkins loan, reduces these numbers to $417 and $4,820.
It should also be born in mind that these numbers assume that repayment starts immediately. However, it is much more usual for students to defer repayment until six months after leaving college which will increase these numbers greatly.
Students with a cosigner with an excellent credit record can not only increase their chances of obtaining a loan in the first place, but they can also reduce their total loan repayment very considerably.
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