A co-signer is a person who signs on with you on a loan, guaranteeing that the loan will be paid. This means that if someone co-signs for a loan for you, that person is just as responsible for repaying it as you are. If the loan goes into default, that person is subject to the same penalties. Lenders often require a co-signer in situations in which the borrower has a poor credit history or no credit history. The latter is often the case with students who are applying for college loans, as they are just coming out of high school and do not have an established credit history yet. Typically, a parent, legal guardian or other close family member is the co-signer. This person must have a reliable credit history and be at least 18 years of age to co-sign.
There are many different types of loans that students can apply for, some of which may require a co-signer and some that do not. The federal government sponsors a student loan program that is designed to help students pay for higher education. Federal student loan programs do not require a co-signer and are not dependent upon credit history, provided that the student has not previously defaulted on a Federal Student Loan. The government oversees two types of student loans: subsidized loans, which are awarded based on financial need, and unsubsidized loans, which are available to any student regardless of need. The government pays all interest on subsidized loans while a student is enrolled in school, as well as during grace periods such as deferments or forbearance, while they do not pay interest on unsubsidized loans. There are two other options for borrowing money for school: private lenders and nonprofit agencies and organizations.
Private lenders will evaluate your credit history to decide whether or not you are a good credit risk, which determines if they will ask for a co-signer. Because there is not any collateral for a student loan (such as property that the bank can repossess), many banks will not lend money to students with no credit history, unless a parent or other adult is willing to co-sign. Many charitable organizations offer loan programs for students, with very attractive interest rates and flexible repayment plans. While some of these loans are awarded based upon financial need, many are awarded to students through essay contests or because the student meets specific criteria, such as enrollment in a certain academic program.
When you have someone co-sign for a loan for you, he should be absolutely aware of the terms of the loan, and of the fact that he, along with you, is entirely responsible for that loan's repayment according to the agreed-upon terms. If, for any reason, the bank/lender does not receive a loan payment on time, that information can be reported to the credit bureaus and will negatively impact the credit score of both you and your co-signer. If you have no credit history, this negative information will drastically lower your credit rating. Conversely, as long as you pay on time, you will begin to build a positive payment history and your credit report will not reflect the fact that you had to have a co-signer to get the loan.
Applying for federal student loan programs is the best option for most students without any credit history, as the rates are reasonable and acceptance does not require a credit history or a co-signer. However, before you take on any student debt, you will want to check into other programs that offer scholarship and grant money. The first step in applying for any type of federal student financial aid is to fill out a FAFSA (Free Application for Federal Student Aid). After you have completed this form, the Department of Education will inform you of your eligibility for grants, loans or both. Grants are money that do not have to be repaid and are given based upon financial need. You should also check for private scholarship and loan programs. There are numerous website directories that can help you locate appropriate agencies. While some private aid is needs-based, much of it is awarded based on performance, either in school or in a specific skill or area of expertise. One last option to consider if you do not get enough scholarship/grant monies and federal student aid, is a PLUS (Parent Loan for Undergraduate Student) loan. These loans are low-interest, do not require collateral and are not needs-based.