Strategies for Student Loan Borrowers Without a Cosigner
“Can you co-sign a student loan for me?”
As more and more students find themselves using student loans each year, more parents are finding themselves facing this difficult question. Cosigning a student loan on behalf of an incoming or current college student can be a risky decision. Not to mention, not all parents are able to cosign a student loan on behalf of their child.
A co-signer is usually needed when an individual is applying for an extension of credit, or a loan, and doesn't have strong enough credit and/or small to no income. As a result of the rising costs of higher education in the U.S., it has become common practice for students to ask their parents or family to co-sign a student loan for them.
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Each year, 12 million students use loans to help pay for college. Out of these 12 million, about 1.4 million students use private student loans to help cover the costs. According to our student debt statistics, 90% of all private student loans are co-signed.
Having a creditworthy parent or guardian can definitely help get you approved. Moreover, having a cosigner may even lower the interest rate on the loan. Every basis point matters when it comes to student debt, especially when the loans are private.
While interest accumulates and capitalizes, even 25 basis points in savings, or 0.25%, can save students hundreds and even thousands in interest over the course of the loan.
But what options are available for students looking for financing options without a cosigner?
At LendEDU we get this question everyday.
We wanted to create a guide for students and parents looking to find student loans without the help of a cosigner. In this guide we will look at a variety of options available for students without additional signatures.
Financial Aid & Federal Debt Doesn't Require a Guarantor
Applying for financial aid is easy and every student should look to maximize their federal financial aid benefits before using private debt. Luckily, the Department of Education offers an array of financial aid options to certain students. Financial aid can include grants, scholarships, and federal financing. Federal financing options should always be used before going through a private lender.
There are a number of different federal financial aid options available. The great thing about federal financial aid is that it doesn't require a cosigner. Everyone is eligible for some amount of federal financial aid - even without having a qualified cosigner. The most popular types of federal financing are Stafford Loans, Perkins Loans, and PLUS Loans. Without getting into too much depth, below are some short descriptions of each of these different types of loans. For more in-depth explanations you should check out the full guides available.
There are two main types of Stafford Loans available to undergraduate and graduate students. The first being Subsidized Stafford Loans. Subsidized Stafford Loans are awarded on the basis of financial need, and carry the benefit of subsidized interest. The federal government pays the accrued interest while a student is in school and during periods of deferment.
Unsubsidized Stafford Loans are not need-based, meaning any student who submits the FAFSA is eligible to receive this kind of aid. However, because these loans are unsubsidized, the student is responsible for paying any interest that is accrued while in school and during deferment. For the 2017-2018 academic year, the federal government set the interest rate for subsidized and unsubsidized Stafford loans at 4.45% for undergraduates. Graduate students will pay a higher interest rate of 6.00%.
The Federal Perkins Loan Program provides assistance to qualifying students who can demonstrate financial need and are seeking a higher degree through an approved post-secondary school. Not every school offers Perkins loans to its students, so you should consult with the financial aid office to find out if the program is in place. Perkins Loans are not underwritten like private student loans. Students who qualify for Perkins loans must be able to demonstrate financial need. (NOTE: The Perkins Loan program was recently discontinued.)
A PLUS Loan is a type of financial aid offered to parents of students enrolled at least half time in eligible programs at participating and eligible post-secondary institutions or graduate and professional students at participating and eligible post-secondary institutions. PLUS Loans have higher interest rates, of 7.00%, in comparison to other types of federal student loans. That being said, PLUS Loan rates can be significantly lower than rates offered by private student loan lenders. PLUS Loans are issued without the necessity of a guarantor, and are not awarded on the basis of creditworthiness. There is no credit check! Instead, parents using PLUS Loans must not show adverse credit history. For more information please check out our PLUS Loan guide.
Private Student Loans
Unlike federal financial aid, private student loans are offered through non-government banks and lenders. There are a number of private lenders in the industry. While each lender has different underwriting and approval criteria, there is a lot of crossover. When it comes to getting approved for a private student loan there are definitely a few pretty clear requirements.
In general, you will need to meet the following requirements to get approved for a private student loan without a cosigner:
- Have a good credit history. Most private student loan lenders are looking for individuals with a credit score of 660 and above. For students with little credit history, this might be a challenge. Having no credit history will make you ineligible for educational debt without a cosigner. Students should and can start building credit as soon as possible. Many banks offer “college cards” with low spending power. By paying your bill on-time each month, you will slowly be able to build credit.
- Have good income. Most private banks are looking for individuals earning at least $25,000 annually. Summer jobs do count as income, however, most students don’t earn that much from summer or academic year jobs.
- Be a U.S. Citizen. Unfortunately, many public financing corporations are not willing to offer student financing options with no underwriting to non-citizens.
If you are approved for college financing with a guarantor you should expect to pay a higher than average interest rate. Some private financing corporations offer rates above 10% for borrowers that apply without a cosigner. The private lenders do this to protect themselves. From their point of view, a student with no cosigner is much riskier to have on the balance sheet.
Before choosing a lender, it’s important to shop around first to find the lender that will offer you the lowest interest rate. Use our private student loan comparison tool to get rate estimates from the leading student loan companies all in one place. Click on the button below to get started.
Disadvantages of Receiving Student Debt Without a Guarantor
Applying for a private student loan with no cosigner is possible as you’ve seen above. That being said, there are definitely some clear disadvantages to getting a loan without an additional signee. College is getting more expensive each year, and federal financing limits don’t seem to be keeping up. While federal debt options are the best option when it comes to student loans, not everyone will be able to get by with the maximum amounts offered.
Private debt can also be tricky. As mentioned above, getting approved is difficult and the interest rates offered are often very high. Over the long run, having a high interest rate on a student loan without a cosigner may be very costly. Interest usually accumulates on a daily basis, and if you are stuck paying +10% interest you may be feeling the pain. That being said, if you are able to graduate and get a good job, you will probably be able to receive lower refinance rates. A refinance student loan, or consolidation loan, is offered by private lenders and replaces your old loans. In the end, you're left with a new student loan and a new interest rate.
Applying Without the Help of a Cosigner
Start by submitting the Free Application for Federal Student Aid, aka FAFSA! Filing the FAFSA is required by many colleges and universities these days, but either way, you must file the FAFSA to get financial aid.
To be eligible for federal financial aid without a guarantor you must submit the FAFSA. It usually takes about 22 minutes to complete and you can even file the FAFSA online. At LendEDU we created a detailed Free Application for Federal Student Aid Guide!
When applying for private financing without the help of cosigner, you really need to shop around. There are many student loan lenders in the industry and each offers different rates and terms. If you are approved without an additional signer, you will likely have a high interest rate.
Shop around before signing that promissory note to ensure that you are getting the best rates available. Even 0.25% is important over the long term!
How Can I Improve My Chances of Getting Approved for an Educational Loan?
As with all types of loans, the amount you are looking to borrower directly affects your chances of getting approved. If you can lower your ask, you stand a better chance of getting approved for a private student loan alone. Why? Well, less risk for the private lender. Asking for a sizable chunk of cash when you don’t have the credit score or income isn't a great strategy. Start by using as little student loan debt as possible! Look for scholarships and grants to lower the amount of money you need to borrow first.
Risks of Cosigning
There are many risks to cosigning student loans that parents, guardians, and other need to consider before signing on the dotted line. Often cosigners don't fully understand the risks and liabilities they are putting on themselves when agreeing to help a student with their loan.
To better understand how cosigners were being affected, we recently conducted a survey to 500 parents and guardians who cosigned on their children's student loans.
While we found many interesting insights, here are some of the key highlights:
- 56.8% believed their credit score was negatively affected by cosigning on a student loan
- 51.2% believed their retirement was going to be delayed because of cosigning
- 65.8% had helped make payments on their children's student loans
- 34.4% said their decision to cosign made it difficult to qualify for mortgages, auto loans, or another type of financing
- 35.0% regretted their decision to cosign
As you can see, many parents and guardians who cosign on student loans are feeling the consequences. While there are not guaranteed to be problems, if the student misses payments, it will negatively affect both of your credit scores. If you are cosigning, be sure to communicate regularly with your child or the primary borrower so you know if the payments are being made or not, and if you need to help.
Parents should also be aware that by cosigning on student loans, they may make it harder for themselves to qualify for other types of loans or credit. This is partially because the student loan will count towards their debt-to-income ratios. Cosigning can also make it more difficult to qualify for other financing if the primary borrower misses a payment and the cosigner's credit is negatively affected, as previously mentioned.
Before locking yourself into a debt dilemma, you should look at grants and scholarships. These days there is a scholarship for everything and everyone. At LendEDU, we even have a scholarship search available for students. Grants and scholarships are free money! By spending just a few minutes a day searching for scholarships, you may be able to save yourself a significant amount of money over the long term.
Unfortunately, student debt is a necessary tool for a lot of people and, if you need a financing without a guarantor, start with federal financial aid before using private financing products!