Applying for student loans is a rite of passage for many college-bound students. Navigating the different types of loans available can be tricky, especially for students who are applying for student loans without a cosigner. Although a cosigner can improve your odds of approval when you apply for a private loan, they aren’t the only option out there. Start by applying for federal student loans, including Direct Loans, which are also known as Stafford Loans.
The United States Department of Education offers Stafford loans, also commonly called Direct Loans, to eligible students based on financial need. These loans normally don’t require a credit check or a cosigner, making them the easiest student loans to obtain without a cosigner. You simply need to complete a Free Application for Federal Student Aid (FAFSA). To complete the application, visit fafsa.gov. You need your Social Security number and driver’s license, federal tax returns, W-2s, income documentation and bank statements. You need to submit the same information for your parents if you’re a dependent.
- Subsidized Stafford Loans: The loans are offered to undergraduates with financial need. The U.S. Department of Education pays interest on the loan while you’re are enrolled in school at least half-time, during periods of deferment and during the loan’s grace period.
- Unsubsidized Stafford Loans: These loans are offered to undergraduate and graduate students regardless of financial need. Schools determine the amount that you’re eligible to receive based on other financial aid information, and you’re responsible for paying the interest during all periods of the loan.
The federal government uses this information to determine your financial need, which is the difference between the cost of attending the school and your expected family contribution. The school uses that information to calculate the amount of student aid, including the Stafford loan amount, that you’re eligible to receive.
Unlike Stafford loans, PLUS loans are offered primarily to parents, although graduate students and professional students also qualify. Although you’re required to pass a credit check, these loans don’t require a cosigner. To apply, if you’re a graduate or professional student, complete a FAFSA. You can borrow a maximum amount equal to the cost of attending the school with any other forms of financial assistance subtracted from the total.
Loan repayment plans vary depending on your individual needs. Some repayment plans include forgiveness programs, which cancel the outstanding balance of your loan after a set term. Options include:
- Standard repayment plans: Fixed payment amount over 10 years
- Graduated repayment plan: Payments start small and increase usually every 2 years over a 10-year period
- Extended repayment plans: Fixed or graduated payments spread over 25 years
- Revised Pay as You Earn: Payments based on income and family size are recalculated every year. Outstanding balances are forgiven after 20–25 years
- Pay as You Earn: Monthly payments are set at an amount equal to 10% of your discretionary income. Payments are recalculated every year and outstanding balances are forgiven after 20 years
- Income-Based Repayment Plan: Monthly payments are calculated every year based on 10% or 15% of your discretionary income. The balance is forgiven after 20–25 years.
With a PLUS loan, you’re also eligible for an income-sensitive repayment plan, which bases the monthly payment amount on your annual income and spreads your payments out over 15 years. Parents with PLUS loans have limited options for repayment plans.
Benefits of Student Loans Without a Cosigner
One of the main benefits of getting your own student loan is the opportunity to build your credit. Establishing a positive credit history early on can help you obtain loans later in life. In addition, without a cosigner, you’re the sole party responsible for the loan. No one else is on the hook if you fail to make your payments.
Additionally, because it can be challenging to qualify for private student loans if you don’t have a cosigner, you might start by applying for federal loans. Federal loans offer increased payment flexibility, payment assistance options and low interest rates that make them an attractive alternative to private loans.
Disadvantages of Student Loans Without a Cosigner
Federal loans limit the amount of money that you can borrow every year. Private educational loans let you borrow as much as you need to pay for college and your living expenses. Because most private lenders have strict credit requirements, it’s difficult to qualify for these loans without a cosigner. Even if you do, you may pay higher interest rates, which costs you more over the life of the loan.
Private Student Loans Without a Cosigner
Private educational loans provide more borrowing power than federal loans, but they also may come with origination fees, variable interest rates and a credit check. If you have a less-than-perfect credit score, you may not qualify. Even if you do, private student loans without cosigners often come with higher interest rates. To illustrate how much of a difference that makes, consider the examples of Rebecca and Joel, both of whom take standard 10-year loans:
Rebecca obtains a combination of scholarships and Federal loans to cover the balance of her tuition, room and board expenses. She borrows $5,500 for the first year, $6,500 for the second year and $7,500 for years three and four at a fixed interest rate of 3.76%. By the time she graduates, she owes $27,000. Her monthly payments are $270.29 and she pays a total of $32,434.80 over the life of the loan.
Joel takes out private loans to cover all of his expenses. He borrows $15,000 per year for all four years at a fixed interest rate of 11%. He owes $60,000 and pays $826.50 per month. By the end of the loan, he pays a total of $99,180.
Building Your Credit – Under 21
In reality, most students and adults younger than 21 have a limited credit history. This can have a substantial impact on your FICO credit score, which is based heavily on your payment history. The Credit Card Act of 2009 made it challenging to get a credit card without a substantial income, which means that students often don’t qualify.
A few strategies that can help build a thicker file include getting a credit-builder loan, a type of small loan offered by small lenders, banks and credit unions. The interest rates can be high, but the reward may be worth it in the end. Alternatively, students who are added to their parent’s credit cards as an authorized user can get a boost based on their parents’ history.
Building Your Credit – Over 21
If you’re over 21 and still struggling, you have options, including obtaining a secured credit card. Because these credit cards are backed by your own cash deposits, they carry lower risk for lenders. Make sure the credit card issuer reports to the three major credit bureaus (Experian, TransUnion and Equifax) so that your payment history counts toward building your creditworthiness.
How Can I Improve My Chances of Getting Approved for an Educational Loan?
One of the most effective ways to improve your odds of approval is to establish a positive credit history well in advance of applying for an educational loan. Take advantage of offers for your free credit score to assess where you stand. Additionally, as part of the Fair Credit Reporting Act, you’re entitled to a no-cost copy of your credit report from each of the credit bureaus every 12 months. Review it carefully for mistakes and report any credit dispute to the credit bureau to correct mistakes.
Reducing the amount of money you’re asking for is another way of improving your chances for approval. Lower amounts mean lower risk for lenders.
When Co-Signers Don’t Pay
But what if you can’t afford to make the payments for the co-signed loan yourself? If the lender can’t collect from the primary borrower, their next course of action is to come after the co-signer in order to collect. This means the lender could sue you for nonpayment and garnish your wages depending on your individual state laws. When this happens, the collection is reported in both the borrower’s and the co-signer’s credit reports. Needless to say, if you have great credit, the last thing you want reported in your credit report is a collection. A collection can wreak havoc on your credit score. (Not sure where your credit score stands? You can get your free credit score right here at Credit Sesame.)
Even if the borrower does happen to fulfill the full terms of the loan and is able to pay off the the debt, your own financial situation may still be impacted by the borrower’s payment history. If he or she accidentally misses a payment, or pays late, it will be reported to the credit reporting agencies — in both your credit report and the borrower’s —and your credit score will take a hit as if you missed the payment yourself. Consider too, that if you co-signed or applied for a joint credit card account, your score will also take a hit if the borrower over utilizes the card and carries a large balance from month to month.
Additionally, once a loan is open, it’s extremely difficult to remove a co-signer from it without closing the account and having the primary borrower refinance the loan in their name alone. Keep in mind too, that if you’re looking to apply for a loan or sign up for a new credit card, lenders view co-signed loans as your own debt—which could impact whether or not you qualify because the lender may not want to extend even more credit to you.
When you co-sign a loan, you also have to consider what happens in the unfortunate event that the primary borrower loses their job, becomes disabled or unable to work — or worse, the primary borrower dies. It’s not something any of us want to think about but it does happen and we can’t predict what life throws our way. Bottom line? If you’re considering co-signing a loan, make sure you’re comfortable taking on the loan as your own in the event the unexpected happens.