Student Loans With a Bad Credit
History and Without a Cosigner Can be Expensive
Author: Donald Saunders
If you have no credit history or a
bad credit score then getting a college loan might not be so simple.
If however you are able to get someone suitable to act as a cosigner
and to guarantee your loan repayment then this will certainly help a
great deal in securing a loan.
Most students generally have few if any credit cards, no not have
car loans and very rarely have a home loan which means that they
simply have little or no credit history against which a lender can
assess the risk in giving them a loan. In addition, in those cases
where students have a credit history it is all too often relatively
poor because, as with many of us when we are young, they have made
some irresponsible decisions and overreached themselves with the
result that they ran into difficulties making their repayments.
Either way the absence of any credit history or a record of late
repayments and perhaps even defaulting on a loan will usually place
a student in a high risk category as far as many lenders are
concerned. Consequently loan officers, including those responsible
for taking decision on behalf of the Federal student loans programs,
will usually handle applications from students in this situation
with care. A lot of times loan applications will be turned down or,
in borderline instances, loans may be granted but a high interest
rate will be applied to balance the risk and as compensation for
increased default rates.
One way to counteract the absence of any credit history or a bad
credit score is for students to use a cosigner for their loan
application. 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.
At the same time it is the parent's credit history which becomes the
chief factor in determining the interest rate to be charged and
those with a superior history will typically get the best rates,
whilst those with lower credit scores will generally pay a high
rate. The difference might seem to be small at first glance but can
in reality add up to a considerable sum over the normal loan
repayment period of 10 years.
For instance, one popular cosigner loan program grants loans at 4%
for borrowers with a superior credit score increasing to 6% for
borrowers with a poorer but nevertheless satisfactory record. This
2% variation may not seem like much but can represent in excess of
$5,000 over the life of a normal loan.
It is not at all unusual nowadays for a student to need as much as
$100,000 to fund an undergraduate education and, even where interest
is paid from the start rather than being rolled up, interest at the
present Stafford loan rate of 6.8% is almost $567 per month or
$6,600 each year. Reducing that interest rate to 5%, which is the
current rate for a need-based Perkins loan, lowers these figures to
$417 and $4,820 respectively.
It also has to be born in mind that these figures assume that
repayment starts immediately. It is however much more usual for
students to defer repayment until six months after college which is
going to increase these figures significantly.
Borrowers who have a cosigner who has a good credit record will not
only increase their chances of obtaining a loan in the first place,
but will also reduce their total loan repayment greatly.
