Credit strategies for cosigning a student loan

Many families find themselves with a balance they still need to pay for college even after receiving financial aid. In response, these families often turn to private student loans to help cover the remaining costs. Private student loans are credit based, so students with no credit history or a low credit score may find it difficult to qualify for a private student loan on their own. Students may have the option to apply with a cosigner—a parent, relative or other creditworthy adult.

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 and the student's credit reports. Cosigners, often parents, who are considering buying a home, refinancing a mortgage, or applying for other loans may be concerned about the effect that cosigning a student 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 on their own.

Only one person can cosign the student loan, so Michael Lux, an attorney and founder of the student loan guidance website The Student Loan Sherpa, says you might want to consider having the parent with the stronger credit history act as cosigner.

“One advantage is that the parent with the better credit profile may be able to help secure a student loan with a lower interest rate," Lux says. “The downside is that the student loan could adversely affect future credit decisions due to the fact that the parent's debt will increase relative to their income.”

There are a couple other strategies parents can use to mitigate the effects of cosigning student loans, while still helping their child pay for college.

Consider your immediate credit needs

Are you planning to apply for a mortgage or refinance in the near future? According to one of the top credit rating agencies, you might want to consider whether you can apply for a mortgage before cosigning or if you can hold off on the mortgage application for six months to a year after cosigning.

If you don't plan on applying for the mortgage in the next several months, cosigning “may have minimal impact on the mortgage loan because the credit histories will have had time to stabilize," according to this article. “With mortgage lending in particular, stability is critical. It's not a good idea to take on new debt just before or during the mortgage process."

This is because applying for and taking out new debt can have an 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.

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 balance cosigning a student loan and applying for a mortgage.

Refinance the loan later

In some circumstances, your student may refinance the loan as the sole borrower, removing your obligation to repay the loan. But there are certain qualifications that your child will have to meet to be approved for student loan 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.

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.