Credit Strategies for Cosigning a Student Loan
When a person cosigns a student loan, they agree to take full responsibility for the debt. The cosigner is responsible for the full amount of the loan, so the debt will appear on both the cosigner's credit report and the student's credit report. Parents who are considering buying a home, refinancing a mortgage or applying for other loans may be concerned about the effect that cosigning a loan will have on their credit. Factors that go into calculating a credit score, such as total existing debt and debt-to-income ratio will be affected, even if the student is repaying the loan without issue.
Only one parent can cosign the student loan, so it may be best to have the parent with the stronger credit history act as cosigner. The other parent's credit will not be affected since credit histories are personal. When the parents later apply for or refinance a mortgage, the lender will consider the credit of both parents, so the impact on loan approval could be minimal.
There are a couple other strategies parents can use to mitigate the effects of cosigning student loans, while still helping their children access a college education.
Consider your immediate credit needs
When are you planning on applying for a mortgage or other loan? If that date is more than a year in the future, the impact of cosigning a student loan will be less than if you apply for a loan within a few months of cosigning.
Applying for and taking out a loan has an immediate impact on your credit score, both from the credit inquiry and the new credit account lowering your average account age. As time passes, the effect of that inquiry and new borrowing lessens. Consider whether you can refinance the mortgage or apply for the new loan before cosigning, or whether you can hold off long enough so that your credit history will have time to stabilize before applying. Talk to a mortgage lender to discuss the impact cosigning may have on your approval. Mortgage professionals deal with these situations regularly and can offer guidance on how to successfully cosign and get loan approval.
Refinance the loan later
In some circumstances, the student may refinance the loan as the sole borrower, removing the cosigner's obligation to repay the loan. But there are certain qualifications that your child will have to meet to be approved for refinancing. They may have to show a history of consecutive, on-time payments, usually for 24 months or more, and they may have to meet income requirements and have a satisfactory credit score. If they've met these requirements, check with the lender to see what options are available.
Embrace this teaching moment with your child
Many students enter college and their professional lives with little knowledge about borrowing, credit and debt. Agreeing to cosign a student loan offers families a unique opportunity to have meaningful conversations about these topics. Make sure your child understands the impact that borrowing and repaying the loan will have on both their credit report and yours.
Talk to your child about debt and credit using their student loans as a real-world example. Helping them manage their loans responsibly now can help prepare them for a lifetime of successfully handling their personal finances.