College students often have few if any credit cards, no car loans and rarely have a home mortgage loan so that they have little or no credit history against which a lender can judge the risks in giving them a loan. In addition, in those cases where students do have a credit history it is all too frequently less than favorable because, as with many of us in our youth, they have made some foolish decisions and overreached themselves with the result that they ran into problems making their repayment obligations.



Either way the lack of a credit history or problems with late repayments and perhaps even defaulting on a loan will often put a student into a high risk category so far as a lot of lenders are concerned. Consequently loan officers, which includes those making decision on behalf of the government's Federal student loans programs, will frequently handle applications from such students with caution. Often loan applications will be denied or, in borderline cases, loans may be granted but a high interest rate will be fixed to balance the risk and to compensate for increased default rates.

One method of counteracting the lack of a credit history or a poor credit score is for students to use a cosigner on their loan application. In a lot of cases this will be a parent and loan officers will look at the parent's credit history when deciding whether to approve a loan.

At the same time the parent's credit history becomes the chief factor in fixing the interest rate to be charged and people with a good history will typically receive the best rates, whilst people with lower credit scores will frequently pay a high rate. The difference may seem small at first sight but can in fact amount to a significant sum over the normal loan repayment period of 10 years.

As an example, one popular cosigner loan program grants loans at 4% for borrowers with a good credit history increasing to 6% for borrowers with a poorer but nonetheless adequate record. The variation of 2% might not appear to be much but could represent in excess of $5,000 over the life of a normal loan.

It is not unusual today for a student to require as much as $100,000 to fund an undergraduate education and, even where interest is paid from the beginning rather than being accumulated, interest at the Stafford loan rate of 6.8% is approximately $567 each month or $6,600 per year. Reducing that interest rate to 5%, which is the current rate for a Perkins loan, lowers these figures to $417 and $4,820.

It also has to be born in mind that these figures assume that repayment starts immediately. It is however much more common for repayment to be deferred until six months after leaving college which is going to increase these figures greatly.

Borrowers who use a cosigner with an excellent credit record can not only increase their chances of getting a loan in the first place, but can also reduce their total loan repayment greatly.