IMPLICATIONS OF GETTING A STUDENT LOAN WITHOUT A CO-SIGNER
A co-signer may not be your first choice when it comes to student loans, but a co-signer can help you qualify to receive private student loans and they can help you receive a lower interest rate. Private student loans are different than federal student loans and it is important that you pay attention to the key differences. It is recommended that students exhaust their federal student loan options before they turn to private student loans. One of the key differences with private student loans is that they do not have the same flexibility of federal student loans and you must begin repayment right away.
Federal student loans do not require you to have any co-signers at all whether you have a good or bad credit score. Private student loans do not necessarily require you to have a co-signer, but they do have strict requirements that you must meet and this normally means that you need to have a co-signer.
If you do try to get a private student loan without a co-signer, there will be some implications and it is crucial that you understand what those implications are before you attempt to apply without a co-signer lined up to help you.
You May Not Receive Approval
The first implication of not having a co-signer is that you may not receive approval for your student loan. Lending and banking institutions will impose a set of rules and criteria that you must meet to be able to receive a student loan through them. If you do not meet these requirements, a co-signer will be required and if you do not have one, your loan will be denied.
Some of the most common requirements include:
- Strong credit history without bad marks or delinquencies
- Good credit score
- Minimum loan amount to be borrowed
- Minimum monthly or yearly income
You Cannot Get the Funding You Need
If you do not have a co-signer for your student loan, you may find that you receive a letter that says your application was declined. In fact, students who apply for student loans without a co-signer only receive approval about 20 percent of the time.
If you do not receive approval, you will be left without the funding you need for your college education. If you are approved without a co-signer, you may notice that the loan amount you requested is cut in half. It is difficult for students to receive the amount of money they request without a co-signer.
If You are Approved, Your Interest Rate May Be Sky High
A co-signer with an established payment and credit history can help lower the interest rate that you receive on your student loans. With a co-signer, you may be able to receive a fixed interest rate of about 4 percent and a variable interest rate of 2.2 percent. Without a co-signer, you can expect that rate to jump quite a bit. In fact, it may even be as high as 6 or 7 percent, which quickly adds up over the length of the loan.
Why Is a Co-Signer Often Required?
Lenders and banking institutions look at the risk associated with providing a student with a loan. Lenders want to minimize the amount of risk that there is. Therefore, a co-signer limits the risk that they have to take on. When you do not have a verified or good track record of on-time payments and credit history, you are considered to be a large risk for the lender. This results in a denial on your student loan application.
When you choose a co-signer, you want to choose one that will meet the minimum requirements of the lender. For example, the co-signer you choose should have a credit score above 650 and a good credit history with a track record of on-time payments. Your co-signer should not have any adverse credit marks such as a foreclosure or bankruptcy.
As you look for a co-signer, you also want to choose someone who has held their job for a few years and makes a good income. You can have a co-signer with good credit, but if their income does not show that they can support your monthly payment amount, you will likely still receive a declination.
Are There Downsides to a Co-Signer?
There are some downsides to having a co-signer, but many of the downsides are outweighed by the benefits. The biggest downside is that there is a financial risk to the co-signer. For instance, if you are unable to make payments due to financial stress, the burden to make the payments on your student loans is left to the co-signer. If payments are not made, the co-signer’s credit history will plummet too.
Any missteps in payments can cause problems with the relationship you have with the co-signer, but with proper financial management and communication, you and your co-signer can work together to make sure payments are made on time.
One of the good things about choosing a co-signer is that he or she can release himself or herself from the loan later down the road. Typically, the co-signer will be able to be removed somewhere between 12 to 36 months after the loan has been paid on time without any issues.
Final Thoughts on a Co-Signer and Student Loans
If you are in need of private student loans, it is crucial that you try to secure yourself a co-signer. If you cannot, then you are still able to receive a private student loan, but it will be much more difficult and you may see a higher interest rate and lower loan limits.
Co-signers can help improve your chances of receiving the student loans you need, but it is recommended that you try to use up your federal student loans first. Federal student loans do have much more flexibility and do not require any co-signers.
Remember, as you look at your options, weigh the pros and cons of each option and then choose the one that best meets your needs.