Most students generally have few if any credit cards, no not have car loans and very rarely have a home mortgage loan so that they simply have little or no credit history against which a lender can judge the risks in granted them a loan. And, where students do have a credit history it is all too frequently relatively poor because, as with a lot of us in our youth, they have made some foolish decisions and overstretched themselves so that they ran into difficulties making their repayments.



In either case the absence of a credit history or problems with late repayments and possibly defaulting on a loan will frequently place a student into a high risk category so far as many lenders are concerned. As a consequence loan officers, including those taking decision on behalf of the government's Federal student loans programs, will normally process applications from such students with caution. Often applications will be turned down or, in borderline cases, loans will be approved but a high interest rate will be applied to offset the risk and to compensate for increased default rates.

One method of counteracting the absence of a credit history or a bad credit score is for students to use a cosigner on their loan application. In most cases this will be one of the student's parents and loan officers will look then at the parent's credit history when deciding whether to grant a loan.

In these circumstances it is the parent's credit history which becomes the primary factor in determining the interest rate to be charged and people with a superior history will typically get the best rates, while people with lower credit scores will generally pay a high rate. This difference may seem to be small at first sight but can actually amount to a substantial sum over the standard 10 year repayment period.

As an example, one popular program grants loans at an interest rate of 4% for borrowers with an excellent credit score increasing to 6% for those with a poorer but nevertheless satisfactory record. This difference of 2% may not seem like much but could amount to more than $5,000 over the life of a normal loan.

It is not at all unusual today for a student to need as much as $100,000 to finance an undergraduate education and, even where interest is paid from the beginning and is not accumulated, interest at the Stafford loan rate of 6.8% is approximately $567 each month or $6,600 per year. Lowering the interest rate to 5%, which is the present rate for a need-based Perkins loan, lowers these figures to $417 and $4,820 respectively.

It should also be remembered that these figures assume that repayment begins immediately. It is however much more usual for repayment to be deferred until six months after leaving college which is going to increase these figures considerably.

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