Student Loans-Co-Signer and No Co-Signer Student Loans

A co-signer is a second party that promises to repay the student loan and generally jumps into the picture when the actual borrower has little or no credit history.

Students, for example, normally have little or no credit cards, car loans and home mortgage loans. Because of this, their credit history is practically non-existent. Or, if it is existent, their credit history is poor because of unwise choices they may have made in the past, such as the inability to repay on credit cards or irresponsibility on making these payments.

This lack of or poor credit history can easily put a possible borrower into the category of those in high risk, causing student loan officers (even those in federal student loan programs) to look at such students with a cautious eye. Due to this credit history, student loan applications may be denied.

To go against this lack of or poor credit history, possible borrowers can simply get a co-signer, like a parent. Student loan officers will then take a look at the co-signer’s FICO score, repayment history and other factors before granting the student loan.

The co-signer’s credit quality usually becomes the main factor in deciding the amount of interest rate assigned. Co-signers with very good credit history tend to get the best rates, while those with lower FICO scores tend to pay a higher rate.

For instance, one well-known student loan program shows a 4% program paying $5,489 in interest over the entire lifespan of the student loan, rising to $10,647 at 6%. A 2% difference may not seem like much, but with modern borrowing amounts and compounding, this scenario is not so unrealistic.

It is actually quite a common practice for students to ask for a student loan of $100,000 for their undergraduate education. And even though the interest is paid right away instead of letting it accumulate over the years of the student in school, interest at 6.8% is could still go up to $567 per month. Annually, this interest could amount to $6,600.

If this interest rate is lowered to 5%, which is the official amount for a Perkins student loan that is need-based, it will lower these numbers to $417 and $4,820. Remember that this example is when repayment begins instantly. If payments aren’t made until half a year after leaving school, which is what usually happens; the resulting amount will be much higher, unless the interest is completely deferred or subsidized.

Having a co-signer with good credit history can greatly lower the total amount of interest you need to pay, as well as improve the chances of getting good student loan features. You can play around with some sample scenarios on your own with the use of the student loan calculator on Bankrate.com.