Homeschooling and Education

A co-signer is a second party who guarantees to repay the loan and usually becomes involved when the primary borrower has no or a poor credit history.

Students often have few or no credit cards, no car loans and very rarely a home mortgage loan. As a result, they have little or no credit history at all. And, as is the case with many of us in our youth, they may have made some unwise choices. They may have gone beyond what they could repay on a credit card and even been irresponsible about making payments.

That lack of credit history or, worse, actual late payments or defaults can easily put a potential borrower into the high risk category. Loan officers, even in Federal student loans programs, will often look at that with a cautious eye. Student loan applications may be denied, or in borderline cases a higher interesst rate is charged to offset the risk and compensate for higher default rates.

To counteract that lack of credit history or poor record, borrowers can and usually should obtain a co-signer. In the average case that will be one or both parents. Loan officers will look then at the parent’s FICO score, outstanding debt to income ratio, repayment history and other standard factors in deciding whether to grant the loan.

The Direct student loans program began about 15 years ago and, in true American fashion, was designed to cut out the middle man. Instead of having banks, credit unions and other private busincesses lend money to students and parents, the Federal government loans the money directly.

Direct programs overlap the alternative, called FFELP (Federal Family Education Loan Program). The latter is the acronym for programs that work through private lenders. Since they duplicate in some ways the FFEL programs, it’s important for lenders to target which they want. Both offer Stafford and PLUS loans.

Direct Loans have the same criteria for eligibility. They follow the same need-based guidelines, or have the same credit check requirements for non-need-based programs. Providing the same programs according to the same standards raises a natural question: how to decide between them?

In part, the decision involves choosing which of two servicers to deal with. Both provide customer service personnel to answer questions. In some cases, the private lender will be more flexible and helpful and the government more bureaucratic or indifferent. In others, the situation is reversed.

Obtaining student aid can be more complicated than playing the stock market. There are literally hundreds of possible scholarships, loan programs and other forms of assistance. But for the overwhelming majority a Federal student loan program is the most likely source of funds to help pay for school.

Most of that money loaned is associated with one of only half a dozen programs. Stafford loans (for students) and PLUS (for parents) with a couple of variations cover most circumstances. But beyond the program names/types themselves, there are two common categories that those seeking funding should be aware of. Which you choose can have a substantial financial impact down the road.

The two categories are: subsidized and unsubsidized college student loans. Students generally make no payments on either type until six months after leaving school whether they graduated or not. But because of the fact that interest amounts are calculated on the outstanding principle (the loan amount), it can add up to a substantial sum over a period of years.

Subsidized student loans are a type in which the government pays on behalf of the student any interest accumulated on the loan during the years attended. Neither the student nor any co-signer, such as parents, accumulate interest on the principle while the student is in school. The clock only starts ticking six months after leaving.