In 2010, for the first time in the nation’s history, student loan debt exceeded credit card debt, with the total outstanding balance around $830 billion. With some calling this the next “mortgage bubble,” understanding your options when taking on this debt is vital for building a healthy financial future. It should be approached with caution and calculation. Increasingly, students are deciding to take out private student loans, as skyrocketing tuition demands that borrowers find ways to fill the gap between available financial aid and federal student loans. When you sign for a private loan, a cosigner is typically necessary. A cosigner is someone who bears the ultimate responsibility of that loan with you – typically parents, legal guardians, or extended family members. Students who wish to borrow private student loans without a cosigner often come across unique difficulties and few advantages.
With the stringent credit requirements, acquiring private student loans without a cosigner is nearly impossible (the only guaranteed student loans without a cosigner are federal loans, as they are need-based with credit rating not being a factor).
“A student pretty much cannot get a private loan without a cosigner,” said Mark Kantrowitz, who runs FinAid.org, a website to help students and parents understand the complex world of financial aid. “That is unless the student has a good and long credit history. Your credit score should probably be in the 800s.”
This means that for most college-bound students, getting student loans without a cosigner would require them to have already established three to four years of credit, making on-time payments every month. Building the required credit score takes time, discipline and great money-management habits.
“If you miss a payment, you’ll have a bad credit score. It’s very easy to get a bad credit score and very hard to get a good credit score,” said Kantrowitz. Sallie Mae, the student loan giant, reported that before the financial crisis froze credit availability and nearly destroyed the economic infrastructure, student loans without a cosigner were handed out to about 50 percent of their borrowers. Today, that number is 7 percent.
Getting student loans without a cosigner, while extremely difficult, has a few benefits.
“One reason would be to maintain independence and allow that loan to build your credit record,” said Dan Kadlec, who maintains Bank of Dad, a blog dedicated towards financial issues relevant to college-age kids and their parents. “If you’ve got a cosigner they have ultimate responsibility in most situations and all your efforts to pay back accrue to their credit records and not yours.”
Furthermore, having student loans without a cosigner makes the pool of available credit for your would-be cosigner much larger. With your student loan bill showing up on their credit history, the lender, calculating a debt-income ratio, may decide that they are too high of a risk. By taking out private student loans without a cosigner, you are allowing greater eligibility for them to secure a mortgage, car loan, or their own student loans.
“By cosigning, they soak up a certain amount of their credit worthiness,” said Kadlec.
If you have less-than-stellar credit, minimal income, and need private student loans without a cosigner to attend college, then you have essentially two options: work on improving (or starting) your credit history or consider a cheaper school.
“Think about going to a community college for a couple of years or a state school before transferring to that big, prestigious university,” said Kadlec. For most in-state public schools, federal aid will provide enough assistance to cover tuition, allowing you more time to work and build a credit history. “The easiest way to save for college is to go to an in-state public school,” said Kantrowitz. “It might not be the big name college you were dreaming of, but you will still get a high-quality education.”
By delaying the move into the big, prestigious university funded with private loans, you will save an inordinate amount of money in the reduced principal and compound interest. Students who unwittingly enroll at the private university with private student loans without a cosigner should research several factors that will influence their future.
“There should be a real hard look at what they should expect to earn once they graduate college,” said Kadlec. Getting private student loans without a cosigner no longer allows the student to “piggy-back” on their cosigner’s credit score, leading to a higher interest rate and, thus, a higher monthly payment. Having this higher rate can lead to problems in the future.
“If you’re going to be a school teacher or a cop then it doesn’t make any sense to take out that money. You’re never going to be able to pay it back. Private education is not worth it then,” said Kadlec.
Just like any student loan, those who take out private student loans without a cosigner should be especially cautious of the tendency to over borrow. “I’ve spoken with students who have taken out loans in the six figures for a bachelor’s degree. How are you planning on paying that back?” said Kantrowitz. “In all likelihood that’s going to be a 2:1 debt to income ratio which means that you are at a very high risk of defaulting on your debt. Even if you don’t default on your debt you are going to be a slave to your debt.”
With its relative unavailability, higher interest rates, and the amount a student typically borrows, private student loans without a cosigner are generally not recommended. In the rare instance where a student can acquire private student loans without a cosigner, that student will currently have an income that meets the creditor’s approval and should also expect a future income that will allow them to comfortably meet the minimum payments each month.
“If you want to accept a low paying job because it’s your ideal job, the reality of the debt is going to force you to get a higher-paying job even if you don’t like it as much,” said Kantrowitz. “The debt hanging over your head is going to influence what you are going to do."