How Does Cosigning a Student Loan Affect My Credit?

·8 min read

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If you have a son or daughter who’s about to enter college, you’re probably thinking about how to pay for school. Ideally, your child qualifies for grants and scholarships, which can cover a portion of or all their tuition.

But, if you’re like most people, your college-bound student may need a student loan. Sixty-two percent of students who graduated from public and nonprofit colleges in 2019 had student loan debt, according to a report from The Institute for College Access & Success.

While federal student loans generally don’t require a cosigner, many private student loans do. Before you cosign a loan, it’s important to understand what that means and how it can affect your credit.

Here’s what you need to know about cosigning a student loan.

What’s a cosigner?

A cosigner is a parent, friend, loved one, or other person with good credit who agrees to repay a student loan if the primary borrower is unable to. This can make it easier for the student to get approved for the loan.

Having a cosigner with strong credit not only boosts the borrower’s chances of approval, but it may allow the student to borrow at a lower interest rate and save money over the life of the loan.

If you’re ready to look into private student loans, use Credible to compare student loan rates from multiple lenders.

Who can be a cosigner?

A student loan cosigner is usually a parent, but not always. Anyone with good credit can be a cosigner, including a spouse, guardian, relative, or friend.

In general, these are the eligibility requirements to be a cosigner:

  • Must be a U.S. citizen of legal age, cosigning without duress

  • Only one person can be a cosigner for a private student loan

  • Must agree to be equally responsible for repaying the student loan in full

How does cosigning a student loan affect my credit?

Any late or missed payments on a cosigned loan will affect your credit score and your child’s credit score. Before you cosign your name on a student loan, make sure you’re willing to risk damaging your credit score if your student doesn’t repay the loan, or makes late payments.

When you cosign for a student loan, the lender will run a hard credit inquiry for each of you, which can appear on your credit report for up to a year. Many credit experts believe a hard pull may drop your credit score by a few points.

Pros of cosigning a student loan

The benefits of cosigning a student loan include:

  • Help the borrower build credit — Many students have a thin credit file or no established credit at all. By making consistent student loan payments by the due date, your student will build a positive credit history.

  • Diversify your credit profile — With a student loan on your credit report, you could improve your credit mix, which accounts for 10% of your FICO credit score. While the credit bureaus like to see a diverse mix of credit, it’s important to note that your credit score won’t improve unless the primary borrower is making regular on-time payments.

  • Lengthen your credit history — Because student loans generally have long repayment terms, they may extend the length of your credit history, which makes up 15% of your credit score.

Cons of cosigning a student loan

The downsides of cosigning a student loan include:

  • Could negatively impact credit history — Your payment history makes up 35% of your FICO credit score, and is more important than any other factor. Even one late payment could harm your credit. And with private loans, one missed payment could cause your loan to go into default status much quicker than it would with federal loans.

  • Affects your credit report in the long term — The student loan will be on your credit report, and any missed payments or other blemishes may remain on your report for up to seven years.

  • Responsible for the loan if your child can’t make payments — The biggest downside to cosigning for a student loan is if the student — the primary borrower — can’t continue making payments, you’ll be on the hook. Adding a student loan payment to your monthly budget may eliminate any margin for error, making it challenging to stay current with your other bills.

Should I cosign a loan for my child?

Take your time to consider all the factors at play before deciding to cosign a student loan, and carefully review the loan’s promissory note before signing it. In some instances, the promissory note authorizes the current student loan and subsequent loans for the same enrollment period.

Before cosigning on a student loan for your child, ask yourself the following questions:

  • Have I exhausted all other options? Check with the financial aid office at your child’s school to see if any grants or scholarships are available. You won’t have to pay these back, so you’ll save money. Also, apply for federal loans before private student loans, as the former offers lower interest rates, deferment, forbearance, and the potential for loan forgiveness. Full-time undergraduate students received an average of $9,850 in grants and $4,090 in federal loans for the 2019-20 academic year, according to the College Board.

  • Do I have a good to excellent credit score? Having good credit will not only help you qualify as a cosigner for a student loan, but it may also help you receive lower interest rates. Check your credit score for free through AnnualCreditReport.com.

  • Can I afford to cover the loan if my child can’t? Many college financial advisors recommend not cosigning when the total student loan debt exceeds your annual income.

  • Am I willing to risk harm to my credit? The primary risk as a cosigner is that you’re relinquishing some control of your credit score to the student borrower. Your reward is knowing you helped your son or daughter receive their higher education.

  • Am I willing to put other things on hold? Because cosigning a student loan increases your debt-to-income ratio, you may find it harder to take out additional loans for a new home, vehicle, or line of credit. It may be helpful to make a list of the types of loans you may need during the student loan repayment period and consider if you’re willing to forgo pursuing those loans.

Credible lets you easily compare private student loan rates from various lenders.

What do I need to know about cosigner release?

When you cosign on a student loan, you should be prepared to remain on the loan for the duration of the repayment term. However, some private lenders allow borrowers to obtain a cosigner release. That means the lender will remove the cosigner from the loan agreement, which releases you from responsibility for the loan obligations. However, not all private lenders offer a release option.

Before you cosign for a student loan, you should fully understand the cosigner release terms. Generally, there are a few requirements to obtain a cosigner release with lenders who offer it, including:

  • The primary borrower (student) must make a specific number of consecutive on-time payments, such as 24 months or 36 months.

  • The primary borrower must agree to a credit check and meet other credit requirements. The lender wants to make sure the primary borrower is financially able to repay the loan without a cosigner.

If you’ve decided to cosign a student loan, visit Credible to compare student loan rates and find the one that’s right for you.

How can my child build their credit so they don’t need a cosigner?

For a student to qualify for a private student loan without a cosigner, they must have a strong credit score while meeting income and credit history requirements. This situation underscores the importance of building credit at a young age. Here are a few ways your son or daughter can begin building credit in their own name.

  • Open a secured credit card: Since traditional credit cards are hard to qualify for when you first start building credit, it may be a better option for your child to get a secured card.
    Secured credit cards work like this: You put down a security deposit, and the lender sends you a credit card with a credit limit equal to the deposited amount. As you make on-time payments, your credit score may improve and, with it, your chances to obtain other forms of credit in the future.

  • Become an authorized user: If you or another family member have solid credit, your child might ask you to add them to your credit card account as an authorized user. As the credit card payments are consistently paid on time, your child will build a positive credit history.

About the author: Tim Maxwell is a financial writer with over two decades of experience. Tim’s work has appeared in USA Today, Washington Post, Bankrate, LendingTree, Fox Business, Credible and more. He also publishes Incomist, a personal finance site that focuses on paying off debt by earning extra income in creative ways.

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