Understanding Credit for Alternative Student Loans
Why do I need a co-signer to get alternative student loans?
Most students can't get alternative student loans without obtaining a credit-worthy co-signer because they have little or no credit history or income. Even if you have enough income and credit history to be approved for a private loan on your own, using a co-signer may help you improve the terms of your loan.
Private student loans with a co-signer generally have lower interest rates and better terms than when a student applies on his/her own. Using private student loans with a co-signer:
- May lower your interest rate
- May lower your origination fee
- May increase the amount of money that you are eligible to borrow (if the school agrees that it's needed)
Are there any alternative student loans that don't require a co-signer?
Think of it this way. Banks and lenders often require some sort of collateral in exchange for providing you with a loan. Common examples of collateral are your house or your car. That way if you don't pay back the loan, your lender can take the collateral and pay off what you owe. In addition to not requiring collateral, alternative student loans usually don't require full payments until you leave school. On most traditional forms of credit, like credit cards or personal loans, you are required to begin making payments on your debt right away. So the lender is assuming a good deal of risk waiting for you to graduate, get a good job and pay them back.
In order for the lender to reduce some of their risk and keep interest rates and fees reasonable for students, they usually require a credit-worthy co-signer. In the event that you cannot make payments, your co-signer is also responsible for the loan payments.
How can I find a creditworthy co-signer?
A co-signer can be any adult you know with a strong credit history, such as a parent, friend or family member that is willing to be responsible for the loan. Before you apply for alternative student loans, your co-signer should probably verify that he/she has the following basic qualifications:
- A good credit history with more than 18 months of borrowing, charging and repayment with few or no late payments on your credit report
- No excessive delinquencies, judgments, accounts that have been charged off or bankruptcies that were pending, filed or discharged in the past two years
- No prior student loan defaults
- Be a U.S. citizen and 18 years or older
- Verifiable income (the amount will vary by lender)
What if my co-signer wants to be removed from the loan?
Your co-signer may only need to be on the loan temporarily. Some lenders allow you to apply to release your co-signer after 2 or 3 years of good payment history. In order to have your co-signer released, you will need to qualify for the loan on your own and/or document your income for your lender.
How will private loan consolidation affect my alternative student loans?
After leaving school, you may find that your payments are simply too high. This might be because you had bad credit when you initially took out your alternative student loans and your interest rates are too high. Or the payback term on your loan may be too short, creating higher monthly payments. Private loan consolidation is a way to combine your alternative student loans together and receive new loan terms. If you have established income and a good credit history after graduation, private loan consolidation may help you lower your interest rate or stretch out your loan term to reduce your monthly payments. If you can get approved for a private loan consolidation on your own, your co-signer will no longer be responsible for your alternative student loans.
How can I learn more about my credit?
For a copy of your free credit report, visit www.AnnualCreditReport.com. Your credit report is a good way to understand your payment history and debt obligations. Once you have reviewed your personal situation, you can research how to improve your credit score online or speak to a financial advisor.