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Cosigner and No Cosigner Student Loan

Updated on September 14, 2008

Cosigner and No Cosigner Student Loans

When it comes to getting private loans to fund your way through college many students run into problems because they have little or no credit history on which a lender can base his decision to grant a loan. Alternatively, a student may have a poor credit history having run into problems meeting such things as credit card repayments or a car loan. In these circumstances a student may be asked to get a second party with a good credit record to guarantee the repayment of the loan and this second party is known as a cosigner.

In most cases a student will turn to a parent to act as cosigner, although it does not have to be a parent, and the lender will then look at the parent's credit score and credit history, including such things as their repayment history and current income to debt ratio, in deciding whether or not to grant the loan. In cases where a parent has a good credit history a loan will usually be granted on normal terms but, where the credit history contains items of concern the loan may either be denied or granted with a higher than normal rate of interest to balance the increased risk being taken by the lender. The difference in interest rates can often appear small but, over the life of say a ten year loan, can add up to a substantial sum.

For example, the interest payable on a cosigner loan with a low interest rate of 6% can be twice that of the same loan at 4% over a ten year period. This seemingly small difference of just 2% can result in an additional repayment for many students of $5,000 or more on a single year's loan funding.

One of the most important things for any student to look at when borrowing money, whether with or without a cosigner, is the interest payable on the sum borrowed. Today interest on most student loans varies from about 5% to 7% and it is not uncommon for students to borrow as much as $100,000 to finance an undergraduate education. This means that once out of college and repaying all of your combined loans you could easily end up paying nearly $600 a month in interest payments alone.

So, even if you are able to get student loans with no cosigner you might well find that a lender will offer you a lower interest rate if you use a cosigner with a good credit rating. Even if the difference is as little as one percent, or even one half of one percent, this can mean a saving over the life of the loan of thousands of dollars


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