A Student Loan With No Credit History And Without A Cosigner Can Be Expensive

By: Donald Saunders

Should you have no credit history or a poor credit score then getting a student loan might not be so simple. If however you can get someone suitable to act as a cosigner and to guarantee your loan repayment then this can certainly help you to secure a loan.

Most students often have few if any credit cards, no car loans and seldom have a home mortgage loan so that they have no credit history against which to judge the risks in granted them a loan. And, where students do have a credit history it is all too frequently less than favorable because, like many of us when we are young, they have made some ill-advised decisions and overstretched themselves so that they ran into difficulties meeting their repayment obligations.

Either way the absence of any credit history or problems with late repayments and possibly even defaulting on loans will frequently put a student in a high risk category so far as many lenders are concerned. This means that loan officers, which includes those making decision on behalf of the Federal student loans programs, will frequently approach applications from students in this situation with caution. Often applications will be denied or, in borderline cases, loans may be granted but a higher interest rate will be fixed to make up for the risk and to compensate for higher default rates.

One way to counteract the absence of any credit history or a bad credit record is for students to use a cosigner for their application for a loan. In most cases this will be a parent and loan officers will consider the credit history of the parent when deciding whether to grant a loan.

At the same time it is the parent's credit history which becomes the chief factor in deciding the interest rate for the loan and people with a good credit history will typically receive the best rates, while people with low credit scores will normally pay a higher rate. This difference could seem to be small at first sight but can in reality amount to a substantial sum over the standard repayment period of 10 years.

For instance, one popular program grants loans at 4% for borrowers with an excellent credit score increasing to 6% for people with a poorer but nevertheless adequate record. The difference of 2% may not seem like much but could amount to in excess of $5,000 over the life of a normal loan.

It is not at all unusual these days for a student to require as much as $100,000 to fund an undergraduate education and, even if interest is paid from the outset and is not accumulated, interest at the present Stafford loan rate of 6.8% is nearly $567 per month or $6,600 per year. Lowering the interest rate to 5%, which is the present rate for a need-based Perkins loan, lowers these numbers to $417 and $4,820.

It should also be remembered that these figures assume that repayment begins straight away. However, it is far more usual for students to defer repayment until six months after leaving college which is going to increase these figures significantly.

Borrowers who have a cosigner who has a good credit record can not only improve their chances of being granted a loan in the first place, but can also lower their total loan repayment very considerably.

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