Even after loading up on need-based grants, pursuing scholarships through the college and private organizations, and taking advantage of federal direct subsidized & unsubsidized loans, a lot of students and their families find that they need a little help covering tuition costs for the academic year ahead.
To secure a private or state-based student loan to help pay for college, entering freshman and even upperclassmen most often need a cosigner - usually a parent, guardian or close relative - to effectively vouch for them.
Students usually don't have the necessary credit, employment history or stable month-to-month income to secure a loan on their own. While student loan lenders want to make students' dreams of attending college a reality, they also require assurance that the loan will get repaid.
Strategies for Getting Approved
Follow the Good Credit Rules
One of the first things that lenders check before approving a loan application is the borrower's credit score and credit history. The history should have little to no payment delinquencies and be free and clear of public records such as judgments or bankruptcies. Collection accounts raise a red flag to lenders as well.
As student borrowers often have little to no credit history, lenders tend to rely on the cosigner's credit history. Even still, anything negative on the student's credit could prevent the loan from being approved.
As a cosigner, you want to avoid any over-reliance on revolving credit and never max out your credit cards, as both of these can lower your credit score, damage your credit history, and hurt your chances of getting a great student loan.
The first step to getting approved for an education loan is to make sure that you pay your other bills on time and avoid delinquency or default on your accounts at all costs.
A good credit score (more on that later), a credit history clear of delinquencies and bankruptcies, and a history of smart borrowing are definitely an asset when it comes to getting approved for a student loan.
If you think avoiding all debt will keep your credit clean and help boost your credit score, you may want to think again. If you have no history of smart borrowing and good repayment behavior, you won't be able to demonstrate to lenders that you are likely to repay the loan. Credit bureaus need a good history of borrowing and repayment to compile a picture of how reliable a borrower you are.
Know Your Credit Score
Just a few years ago, student loans were slightly easier to secure without a co-signer (but often came with a much higher interest rate due to the increased risk), but now lenders use more demanding underwriting criteria and almost always require a credit-worthy cosigner.
In the past, a credit score in the low 600s might have sufficed to pick up a student loan. Lenders are now requiring scores in the middle-to-upper 600s and a history of good credit before approving a loan.
Check Your Credit Report & Beware of Collection Accounts
Before you apply for a loan, you'll want to take a look at your credit report (get one for free through Annual Credit Report) and take note of an any transactions you didn't know about, such as collection accounts for medical bills, your mobile phone plan or cable company. Collection accounts, which you may not even be aware of, can lower your credit score and make you ineligible for a loan. Make sure you get any of these accounts paid up before pursuing any new credit.
You'll also want to review each item on your credit report in order to identify inaccuracies. You want your credit report to be as clean as possible by the time you are ready to apply for your college loan. It can sometimes take a few weeks to get everything cleared up, so take this step ASAP.
Have Steady Employment
Students typically do not have steady employment and an income at the time they borrow for college. Because of this, lenders most often rely on the cosigner's employment history and income when approving a loan. Lenders often have a minimum income requirement, and that requirement may be for an individual or for a household. If you are self-employed, you are probably going to need to show at least two years of steady income above the lender's minimum threshold. If you are considering starting your own company, the time to do it may not be right before you need to co-sign your child's loans, unless you have another person in the family who can co-sign.
Keep your Debt-to-Income Ratio Low
Debt-to-income ratio is often an important component of the loan underwriting process. Even with great credit, steady employment, and proof of savings, if your monthly expenses are too high, you may not be able to qualify for the lowest possible rates - or a loan at all. Aim for your monthly debt payments to be as low as possible at the time you apply for a loan. Some lenders will have a standard threshold you need to be below in order to qualify. Others may give you a higher interest rate the higher your debt-to-income ratio is. Consider paying off balances on credit cards and putting them on the shelf until your loan has been approved and pay off any additional debts if you can.
Build Up Liquid Assets
Cosigning parents often worry that if they have a well-funded savings account, that will hurt their chances of securing a college loan.
This worry, though, is frequently misplaced since most lenders like to see a de facto contingency fund in the form of liquid assets to ensure that the cosigner would be able to repay the loan even if they experienced some financial difficulties due to sudden illness or an unexpected stretch of unemployment.
Thinking of applying for a college loan? Download the Guide to College Borrowing. The first step is to educate yourself.