Most students have very little or no credit history therefore they often go searching for loans with no credit requirements. This may sound like a good strategy but the reality is that most private student loans companies require some sort of credit check – the companies will also more often than not require borrowers to have someone cosign their loan. If this is not the case you will still probably be subject to other terms and conditions and also much higher interest rates than someone who does have a cosigner.
Private lenders often require credit checks for student loans because they can use your credit history to predict whether or not you will be able to repay the amount borrowed. A credit score is based on several factors regarding finances including acquiring and paying back debt. If you have a limited, nonexistent or negative credit history you are seen as a riskier investment, which is why students often have difficulty securing private loans without a cosigner.
A cosigner will usually have a better or more established credit history than you, this can help you qualify for a private student loan. There are serious legal implications with having a cosigner – they will be held responsible for the loan if you do not meet the repayment obligations. It doesn’t matter whether or not you are unable to make payments because of financial difficulties or because you simply don’t want to, the person who cosigned the loan will be expected to pay off your debt if you do not.
The US department of Education, offers The Direct Loan Program which is a student loan service that does not require a credit check or cosigner. The program is designed for students who have little or no credit history, which is why federal loans will have lower interest rates than private loans and offer more flexible repayment plans, especially if you suffer economic hardship after leaving school. In addition to typical 10 and 25 year repayments plans, federal loans allow you to base repayment on your income or let you defer pay repayment until your financial situation improves – borrowers can also consolidate their federal loans into one which could lower their monthly repayment.