Student Loan Co-signing & Credit Strategies

Student Loan Co-signing & Credit Strategies

Numerous people have a college tuition balance after they receive financial aid. It is common for these individual’s to seek private student loans to take care of this extra amount. 

It is essential to note that one's credit is used for private student loan qualifications. Therefore, people with a low credit score or zero credit history can have a hard time qualifying for any private student loans themselves. Students may be able to use a relative, parent, or another creditworthy person to apply with a co-signer. 

Co-signer Debt Responsibilities

Anyone who co-signs a student loan is saying that they agree to take on the complete debt responsibility. The co-signer must pay the full amount of the loan if the student does not pay. Therefore, the debt appears on both the student's and the co-signer's credit reports. 

Parents are typically the co-signers. However, if they are in the process of refinancing a mortgage or purchasing a home, applying for additional loans can cause some concern about their credit when they agree to act as a co-signer.

There are specific factors that come into play regarding credit score calculation. This includes debt-to-income ratio and existing debt, even if the student is planning to repay the loan by themselves. 

Note that only one individual may co-sign a student loan. Therefore, it is vital to consider which parent or person has the higher credit history and better credit score when picking your co-signer. 

Relying on a stronger credit profile may allow the student to qualify for a loan with a lower interest rate. However, the student loan may affect future credit decisions for the parent since their debt will increase while their income remains the same.

Thankfully, there are other strategies parents can consider to counteract the negative effects of consigning student loans. 

What are your Immediate Credit Needs? 

Will you be refinancing your mortgage soon or applying for one? It is essential to consider your short and long-term financial goals before agreeing to co-sign any type of loan. You may prefer to apply for a mortgage first or plan to put your mortgage application off for 6 to 12 months after you co-sign.

If you are not applying for a mortgage soon, co-signing may have less of an impact on a mortgage loan. Credit histories take time to stabilize and if there is some time in between, you may be fine. Stability is essential with mortgage lending. It is never wise to take on new debt during the mortgage process or before initiating it. 

Taking out new debt and even just applying for it will impact your credit score. The credit amount and the credit inquiry can lower your average account age. With time passing, the effect of new borrowing and the inquiry eventually becomes less. 

Speak with a mortgage lender to find out how co-signing a student loan will affect your credit approval. This is a common concern that mortgage professionals deal with on a regular basis.

Refinance the Loan at a Later Date

In certain scenarios, the student may be able to refinance the loan as the sole borrower. This will remove your obligation as a co-signer. There are specific qualifications your child will need to meet before being approved for student loan financing including establishing their credit. 

This is accomplished by showing a history of on-time, consecutive payments, generally for two years or longer. They may need to meet certain income requirements and prove they have a satisfactory credit score to qualify on their own. 

Passing on Financial Wisdom to your Child 

The majority of students initiate their professional and college lives without much knowledge regarding debt, credit, budgeting, or borrowing. By taking the co-signing route for student loans, families have a chance to engage in meaningful conversations about these factors. Set the standards for finances and communication. 

Ensure your family member understands the impact of repaying and borrowing the loan and how it will affect both their credit and your own.