With average college tuition costs at $20,090, according to the College Board’s 2016 Trends in College Pricing report, students continue to rely on financial aid as a vehicle to get them through school.
Grants, scholarships and federal student loans are primary options for students, but some situations call for private student loans.
Students seek out private student loans for a number of reasons. Sometimes they don’t qualify for higher financial aid awards; some students are not eligible to apply for federal financial aid; or the cost of a graduate school program simply far exceeds the amount of money they’ve been awarded.
The process of getting a private student loan can be challenging (and time consuming), if you’ve decided to apply for a private student loan without a cosigner.
In this guide, we’ll walk you through:
- The difference between federal and private student loans
- Why students need a cosigner
- How to understand credit scores
- How a private student loan helps you
- How to get a private student loan without a cosigner
Federal vs. private student loans
Secured and backed by the U.S. government, federal student loans offer a fixed interest rate that’s consistent during the loan term. Federal student loans may also be subsidized (when the federal government pays the accruing interest on the loan) and deferred while students are enrolled at least half time in school.
Currently, the federal interest rate for an undergraduate subsidized or unsubsidized direct student loan is 3.76% APR, and 5.31% APR for an unsubsidized graduate-level direct loan.
Private student loans differ from federal student loans, in that private student loans can be variable (i.e. change up or down depending market interest rate trends). They also typically don’t offer a grace period or deferment period, and therefore require borrowers to repay the loan and any accrued interest as soon as the funds are dispersed– even if the student is still in school.
Unlike a federal student loan which does not require borrowers to secure a cosigner, private student loans may require students to have a cosigner, before being approved for the loan.
|Federal Student Loans||Private Student Loans|
|You’ll not have to start repaying your federal student loans until you graduate, leave school, or change your enrollment status to less than half-time.||May require payments while you are still in school.|
|Interest rate is fixed and is often lower than private loans.||Private loans can have variable interest rates, some greater than 18%.|
|Don’t need to get a credit check for most federal student loans.||Private student loans may require an established credit record.|
|You won’t need a cosigner to get a federal student loan in most cases.||You may need a cosigner.|
|Interest may be tax deductible.||Interest may not be tax deductible.|
|Loans can be consolidated into a Direct Consolidation Loan.||Private student loans cannot be consolidated into a Direct Consolidation Loan.|
|You may be able to temporarily postpone or lower your payments.||Private student loans mostly does not offer lowering payment options.|
|Usually, there are no prepayment penalty fees.||May have prepayment penalty fee depending which lender you go with.|
Why do students need a cosigner?
If for any reason you cannot repay your debt– for example, if you’re suddenly unemployed, have a debilitating accident that affects your ability to pay off the loan or if you pass away unexpectedly– a cosigner promises to repay the lender any outstanding debt on your behalf. This person is the lender’s guarantee that they’ll get their money back, as promised.
Though not all student loan borrowers require a cosigner, some lenders require it if students have:
- Poor credit – A past bankruptcy, poor credit score or a credit history riddled with late payments or default are a signal to lenders that you might not have what it takes to make good on the loan. Students with an unsavory credit background are often required to have a cosigner with good credit named as a back-up payee on the loan.
- No credit – Students who do not have a credit history at all (i.e. no credit cards or existing loans under their name), are considered riskier borrowers than a student with existing credit simply because, without a credit breadcrumb trail, your repayment habits are a huge unknown for lenders.
Asking students to leverage the credit history of a cosigner is beneficial for lenders, but it’s a daunting requirement for students, and puts a major liability on the cosigner themselves– cosigning a loan is a serious responsibility, which is why student loan cosigners are usually a parent or close relative of the student.
How to understand credit scores
Borrowers might need to give their credit record a little extra TLC, if they have no credit, or if they’re among the 42.98% of Millennials who have “subprime” credit (a Vantage Score between 300-600), according to TransUnion’s 2016 Generational Differences in Credit report.
Students who want to get a private student loan without a cosigner, must understand how credit bureaus (Equifax, Experian and TransUnion) calculate credit scores. The industry-standard credit scoring model, called the Fair Issac Corporation (FICO) score, is broken down into weighted categories:
- Payment history (35%) – This factor is based on whether past debts were paid on time, and is the largest factor when calculating a credit score. If delinquencies are present, FICO looks at how recent the incidents were, how many occurred, the dollar amount of the late or missed payment and how late they were.
- Amounts owed (30%) – A credit utilization ratio is the amount of owed debt compared to the amount of credit available. A healthy ratio is approximately 10%; borrowers owing significantly more than 10% of their available credit makes lenders suspicious that these individuals might be at a higher risk of making late payments.
- Length of credit history (15%) – Credit scores assess the average life of your credit accounts, which account is your oldest and newest and the last time the accounts were used (e.g. credit cards).
- Credit type (10%) – Credit bureaus like to see that borrowers know how to balance different kinds of credit, from credit cards that carry a revolving balance to installment loans (such as a federal student loan or car loan).
- New credit (10%) – Students in need of a credit score boost can’t simply open five new credit cards in a six-month period and expect to ace this category– in fact, this approach might do the opposite. Be selective when opening new lines of credit, and allow new accounts some time to mature before exploring additional new credit accounts.
While these percentages can be helpful, FICO is not as transparent that the exact algorithm they use determine credit scores, which is why striving to hit all of these categories is more important than focusing on just one.
How private student loans help
So, if getting a private student loan is so daunting, are they really that valuable? It depends on each student’s level of financial need and resources available to them.
A personal student loan is a valuable resource for those who: need to supplement federal aid or don’t qualify for federal aid.
Not only do private student loans act as a financial lifesaver, there are a growing number of loan servicers, such as CommonBond and SoFi, that are promoting a positive and supportive community for its members.
“I personally know individuals at CommonBond, because they’ve taken the time to get to know me,” said Erica Swallow, an MBA student from the MIT Sloan School of Management. “They put a personal touch on everything.”
How to prepare for a private student loan
Students who’ve decided to take the private student loan route, without the help of a cosigner, need a few things in place before submitting an application.
Step 1: Submit a FAFSA
The best place to start is submitting a Free Application for Federal Student Aid (FAFSA) even if you think you won’t get federal awards. The application takes approximately 30 minutes to complete, and (as its name states) it’s free.
Step 2: Secure income
Lenders need to see that you have a reliable source of income to repay the loan. In addition to factoring in how long you’ve work with your employer, they’re take note of your gross and net wages.
Consider supplemental income streams, such as a part-time job or freelancing that can help increase your ability to repay the loan.
Step 3: Consider a secured credit card
When it comes to improving or maturing your credit record, a secured credit card lets you build credit using a secured deposit. You provide a deposit as collateral, and the credit card issuer will provide you a line of credit (typically) in the amount you’ve deposited.
As you make purchases and payments on the secured credit card, you’re steadily building a positive credit footprint for yourself– assuming you’re making at least the minimum payment on time.
Step 4: Have Your Rental Payments Reported
RadPad, an apartment locator tool, cited that “2016 graduates could be paying 76% of their income on rent.”
With such a large chunk of your paycheck going toward housing, make those payments work in your favor. Ask your leasing company or landlord to report your on-time payments to the three credit bureaus.
Not all credit scoring models use rental information as a factor, but if your lender uses a credit score that does (e.g. VantageScore), you’ll have a greater edge in securing a private student loan without a cosigner.
Research the credit requirements of different student loan lenders to get a sense of how much you need to improve your credit to get approved. Getting a private student loan without a cosigner is certainly doable, if you give yourself enough time to take the right steps and allow your credit to mature in good standing.