Students who do not qualify for financial aid or scholarships — or whose financial aid and scholarship awards aren't enough — have the option to pay for their college educations with student loans. Loans through the federal government's education lending program do not require co-signers, but if your child opts for a privately funded student loan, you may need to co-sign the loan before your child will qualify. Before you sign on the dotted line, however, be aware that doing so will have an impact on your credit scores.
Immediate Credit Impact
After the lender approves the loan, it will report the loan to the credit bureaus. A trade line reflecting information about the loan, such as the amount borrowed and the lender's name and contact information, will then appear on both your credit report and your child's credit report. The additional loan trade line could be detrimental if you plan to apply for a mortgage or finance other large purchases in the near future. Lenders examine your credit history and compare your income to the amount of debt you carry. This is your “debt-to-income ratio.” Additional debt in the form of a student loan will increase your debt-to-income ratio and may make it more difficult to qualify for future financing.
Impact Over Time
The payments your child makes over time determine whether the student loan will help or hinder your credit scores. Timely payments benefit your credit rating while late or missed payments will hurt you. Depending on how high your credit score is currently, a single missed loan payment could cost your credit over 100 points. Should your child default on the loan payments, this too will appear on your credit report and do catastrophic damage to your credit rating.
Additional Credit Consequences
If carrying a defaulted student loan on your credit report isn't bad enough, you could suffer additional consequences in the form of a court judgment. When you co-signed the loan, you agreed to accept responsibility for repayment in the event the primary borrower defaulted. Because of this, the lender has the legal right to sue you following a default. If the lender wins its suit, the court will grant it a judgment. The judgment will subsequently appear on your credit report as a negative entry – further crushing your already-damaged credit scores.
You don't have to remain locked into your child's student loan obligation forever. After your child graduates from college and builds a solid credit history of his own, he can consolidate any student loans he previously received into a new repayment program. Provided you do not act as a co-signer for the new consolidation loan, you will be released from your obligations as co-signer. Some private lenders, such as Sallie Mae, offer co-signer release programs without consolidation. If your child meets the criteria for these programs, such as being employed for a certain amount of time, he will qualify to release you as co-signer and take on sole responsibility for paying off the loan's remaining balance.
- FinAid: FAQs About Financial Aid
- SallieMae: Frequently Asked Questions About Credit History and Student Loans
- LendingTree: Calculating Your Debt-to-income Ratio
- MSN Money: 5 Ways to Kill Your Credit Scores
- Bankrate.com: Debt, Collection Agencies and Your Rights
- Bankrate.com: Remove Co-signer From Private Student Loan
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.