How Does Cosigning a Student Loan Affect My Credit?
September 26, 2019
If your college-aged child needs a private student loan to fill in any funding gaps for college, they may not have the credit history to qualify on their own. This is where you might come in, to help as a cosigner.
Cosigning a loan can be the determining factor in helping your child qualify for a loan and get the lowest interest rate available. Before jumping on, make sure you know what cosigning is, the potential risks, and how it can impact your credit score.
What is a cosigner?
A cosigner is someone who agrees to take out a loan with someone who wouldn’t be able to qualify on their own, or to help them get a better interest rate. As a cosigner, you’re responsible for the loan just like your child is. If they can’t make timely payments, you’re on the hook for them.
But a cosigner can be a make-or-break point for students who need private student loans for school. Most college-aged students don’t have the credit history to prove they’re responsible enough to take out a loan, and will need the help from their parents.
When you become a cosigner, you and your child will have hard credit pulls and new loans show up on your credit report. Alone, your child may not be approved for a loan. But if you have excellent credit, they not only get the loan, but the best interest rate you can help them qualify for. This can help your child when repaying the loan because it means they’ll end up paying less in interest compared to someone with good or excellent credit. It also makes monthly payments more manageable and they’re less likely to miss a payment.
Does cosigning a student loan affect credit?
Cosigning a loan impacts both you and your child’s credit score. Any party who applies for the loan gets a hard credit pull, which can temporarily cause your score to dip a few points.
Luckily, after a few months, your credit will likely head back up, assuming all else stays normal. You may want to limit applying for new credit, like a credit card or another loan, soon after cosigning a private student loan. This will help keep your hard inquiries low, so your credit won’t be impacted as much.
A private student loan can help your credit in a few different ways, including:
- Adding to your credit mix. A private student loan diversifies the type of credit you have, which can increase your score. Showing off both revolving credit (like credit cards) and installment loans (like private student loans) looks healthy to credit bureaus.
- Having new credit. While the longevity of your credit history is important, so is adding to it. Even though it has a low impact, new credit can sometimes give your score a boost.
Aside from a hard inquiry, private student loans can hurt your credit in ways like:
- New loan responsibility. Even though your child is responsible for paying off the loan, your name is on it. This means you’re responsible for it, too. If your child misses a payment, their credit score could drop and so could yours.
- Possible default. Enough missed payments could cause your loan to go into default and possibly collections. That means you’ll owe the balance in full. It not only causes your credit score to tank but severely hurts your chances of getting approved for other credit opportunities in the future.
- Limited assistance. If neither of you can afford to make the payments on your private student loan, you don’t have as much help as you would with federal student loans. For instance, federal student loans have income-driven repayment plans, deferment, and forbearance. While some private student loan lenders offer assistance, they’re not required to, and not all of them do. You might be able to refinance your loan, which can help lower your interest rate and/or monthly payment.
Should you cosign a loan for your child?
If you’re thinking about being a cosigner for your child’s private student loan, take some caution. Ask yourself and your child a few questions first.
- Do you have any other options? Make sure you’ve gotten all the money you can through grants, scholarships, and family contributions. Then make sure you’ve taken advantage of all federal student loans available to you. If there are still funding gaps, consider a private student loan.
- Do you have a great credit score? You can help your child qualify for a private student loan with good and even fair credit. But to get the lowest interest rate available, you’ll need to have excellent credit, or a score around 800 and above.
- Do you have a repayment plan? If your lender starts payments after your student graduates, is your student planning to repay the loan, or are you? If it’s your child, can they afford the payments? What happens if they can’t make a payment? How will you avoid a missed payment? Outline how you’ll tackle each instance to cover yourselves in the event your original plan doesn’t work out.
While private student loans aren’t always necessary, they might be right for some families. Explore all your options and compare lenders before completing an application. You can compare rates using Purefy’s rate comparison tool to make sure you’re getting the best rate for you.