When you have no credit history or a bad credit score then obtaining a student loan can be difficult. But, if you are able to get someone suitable to act as a cosigner and guarantee your loan repayment then this will certainly help a great deal in securing a loan.
Students usually have few if any credit cards, no not have car loans and seldom have a home mortgage loan so that they simply have little or no credit history against which a lender can assess the risks in granted them a loan. And, in those cases where students have a credit history it is often relatively poor because, as with many of us when we are young, they have made some ill-advised decisions and overreached themselves with the result that they ran into difficulties making their repayments.
In either case the absence of a credit history or a record of late payments and possibly defaulting on loans will normally put a student into a high risk category as far as the majority of lenders are concerned. As a consequence loan officers, including those responsible for taking decision on behalf of the government's Federal student loans programs, will generally handle applications from students in this situation with caution. Often applications will be denied or, in borderline instances, loans will be approved but a higher interest rate will be applied to balance the risk and as compensation for higher default rates.
One method of counteracting the absence of a credit history or a poor credit record is for students to have a cosigner for their application for a loan. In a lot of cases this will be one of the student's parents and loan officers will consider the parent's credit history when deciding whether or not to grant a loan.
In this case the parent's credit history becomes the primary factor in fixing the interest rate to be charged and people with a good credit history will more often than not get the best rates, whilst people with low credit scores will generally pay a higher rate. This difference can appear to be small at first sight but can in reality add up to a substantial sum over the normal repayment period of 10 years.
For instance, one popular cosigner program offers loans at 4% for borrowers with a superior credit score rising to 6% for those with a poorer but nevertheless adequate record. The difference of 2% may not seem like much but could represent in excess of $5,000 over the life of a loan.
It is not uncommon nowadays for a student to require as much as $100,000 to fund an undergraduate education and, even where interest is paid from the start and is not accumulated, interest at the present Stafford loan rate of 6.8% is close to $567 per month or $6,600 each year. Lowering that interest rate to 5%, which is the current rate for a need-based Perkins loan, reduces these figures to $417 and $4,820.
It should also be remembered that these figures assume that repayment begins immediately. However, it is much more common for students to defer repayment until six months after college and this is going to increase these figures greatly.
Borrowers who use a cosigner who has a superior credit record will not only increase their chances of obtaining a loan in the first place, but will also lower their total loan repayment significantly.
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