Why Should You Co-sign a Student Loan?

At the time of researching your student loan consolidation info alternatives you should look at co-signer and no co-signer student loans, as often when the original borrower has poor credit, they ask a secondary party to guarantee to pay for the loan and they are called a co-signer. Many students do not start out with credit accounts and they have never even had a car loan. This causes them to have a very short credit history. Many times our students have made poor decisions in the past with their credit.

They often end up with a balance on their credit card that they can’t repay with monthly payments. Having a poor credit score, or the lack of one will put the hopeful applicant into what is known as a high risk credit category. Loan officers are trained to look for that information in your credit history, even the ones with a federal student aid plan. Loan applications can be denied, or accepted, but with a high interest rate to offset the probability that your loan will go into default.

Co-signers are needed in the event of bad credit or simply having no credit score at all. Generally the co-signer will be the parents of the borrower or other close relative. Bankers will evaluate whether or not to loan you money based on your parent’s credit history, FICO score and debt to income amount. Now, it is up to the parents credit for deciding what the interest percentages will be. Generally those with a poor credit score will have higher interest rates than ones with superior credit ratings. A popular student loan plan shows that with an interest amount of 4% it will cost $5,489 in interest and at 6% it rises to $10,647. A 2% difference doesn’t sound like much, but given contemporary borrowing levels and compounding, such a scenario is not unrealistic.

Students and parents are often financing up to $100,000 for their education. Even if you make the interest payments while the student is in school, so that it doesn’t add to your balance owed, the payment would be $567 at a 6.8% interest rate every month. The interest amounts for the entire year would be about $6,600. Lowering that interest rate to 5% (the official amount for a need-based Perkins loans) reduces those numbers to $417 and $4,820. Remember the example is assuming payments will begin immediately while the student is in school.

If the interest is not deferred or subsidized, waiting to start the payments until you are out of school will cause these numbers to be much higher. Over the length of the loan, a co-signer will help to lower your overall amounts paid in interest by getting a better interest rate than you would have gotten on your own. Many websites have a great calculator for figuring sample situations that might apply to you. The information detail in this article will form an important part of any student consolidation loan information.

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