Students with little or no credit will usually require someone to co-sign a private student loan, but parents and students are encouraged to be cautious before jumping to this option.
Co-signers, who are usually parents or another close relative or family friend, are putting their own credit scores on the line when they co-sign. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
Before taking this risk, borrowers and co-signers should do the following:
- Look at all sources of federal student aid. This aid comes in many forms, including grants, scholarships, and federal work-study money. There are also federal student loans that have lower interest rates, additional repayment options, and do not require anyone to co-sign. Parents can also apply for a parent PLUS loan to help their student pay for college.
- Read and understand everything in the terms and conditions. Private loans have much less protection on them, and the penalties for missing a payment can be much worse. Some also do not include things like death discharge, which means if the student dies, the co-signer is still responsible for paying back the loan.
- Look at the interest rate. Federal student loans have fixed rates for the lifetime of the loan, but private loans often have variable interest rates that can greatly increase over the years, leaving borrowers with a much larger monthly payment than they had planned on.
- Check the repayment terms. Some private loans require borrowers to begin paying on them right away, even while they are still taking courses.
Find out quickly at what rate you can refinance your student loan.