Since most aspiring college students have minimal or nonexistent credit histories, they often look for loans with no credit requirements. While this sounds like a good strategy, the reality is that most private student loans entail some sort of credit check; more often than not, these lenders will also require borrowers to have someone cosign their loan. Even if you are lucky enough to find a private lender who does not request a cosigner, you will still probably be subject to different terms and much higher interest rates than someone who has a cosigner or a better credit history.
Private lenders frequently require credit checks for student loans because they use credit history to predict whether or not you will be able to repay the amount borrowed. Your credit score is based on several factors regarding finances, including acquiring and paying back debt. A person with a limited, nonexistent, or negative credit history is seen as a riskier investment, which is why students often have difficulty securing private loans without a cosigner.
There are serious legal implications with having a cosigner, which is another person who signs your loan. Usually, your cosigner will have a better or more established credit history than you do, which can help you qualify for a private loan. As with non-cosigned loans, you will receive all money and be expected to repay that amount, along with any interest you accumulate. If you fail to meet repayment obligations, your lender will hold your cosigner responsible for the loan. It does not matter whether you are unable to make payments because of financial difficulties or because you simply don’t want to – the person who cosigned your loan will be expected to pay off your debt if you do not.
The Direct Loan Program, offered by the US Department of Education, is a student loan service that does not require a credit check or a cosigner. This program is designed for students who have little or no credit history, which is why federal loans are often a better choice than loans from private lenders. In most cases, federal loans will have lower interest rates than private loans and offer more flexible repayment plans, especially if you suffer economic hardship after you leave school. In addition to typical 10- and 25-year repayment plans, federal loans allow you to base repayment on your income or let you defer repayment until your financial situation improves. Borrowers can also consolidate all their federal student loans into one, which could result in a lower monthly payment.
To apply for a Direct loan, fill out the FAFSA (Free Application for Federal Student Aid). The FAFSA not only gauges your eligibility for loans; it also determines whether or not you qualify for other financial aid, such as federal grants or the work-study program. Some programs have limited funding or enrollment, so sending your FAFSA in early maximizes the different types of aid you could receive. Since some forms of financial aid do not require repayment, submitting your FAFSA now could save you hundreds of dollars in student loans later.