Does Cosigning a Loan Affect My Credit?
Categories: Blog, For Cosigners, For College Students, For Parents and Cosigners
How Does Cosigning a Student Loan Affect My Credit Score?
If you’re wondering how cosigning a student loan affects credit, the answer is—it depends. Cosigning a student loan could have positive impacts on your credit, negative impacts on your credit, or no impact on your credit. It depends on how the student borrower, in this case the student whose loan
s you are cosigning, makes payments. However, many factors can influence the impact of cosigning a student loan on your credit.
Is a Cosigner Necessary for All Student Loans?
Let’s start with the basics of what is a cosigner. A cosigner is someone who agrees to accept responsibility for the repayment of a loan if the student borrower fails to fulfill their financial obligation. Ultimately, the cosigner assumes the financial risk if the student borrower defaults on their loan or fails to make timely payments.
Whether a cosigner is required will depend on the student borrower’s specific financial circumstances and requirements their lender may have. These qualifications generally include financial factors such as the student borrower’s age, income, credit score, and other criteria.
Even if a student qualifies for a loan without a cosigner, opting to apply with a cosigner can have additional benefits. Depending on the lender, adding a cosigner may help the student qualify for a larger loan and more favorable rates and terms.
When is a Cosigner Necessary for Student Loans?
- Age – Some lenders may require cosigners for student loans if the student borrower is below a certain age, usually between 18 and 22 years old (depending on the state).
- Credit Score – Most lenders will require a cosigner if the student borrower has no credit history or a low credit score.
- Employment History – Many lenders will require a cosigner if the student borrower lacks sufficient employment history (this is a common scenario for aspiring college students just finishing high school).
- Income – Most lenders will require a cosigner if the applicant’s income does not meet the minimum requirement, which is very likely to be the case for many prospective students.
- Debt-to-Income Ratio – Most lenders will require a cosigner if the applicant’s debt-to-income ratio is above a certain threshold.
Even though most private student loan lenders will require a cosigner, not all will, or at least, not in all circumstances. Ascent offers both loans with a cosigner and no-cosigner student loans, depending on your needs and eligibility.
How Your Credit Score is Impacted When Cosigning a Student Loan
The impact of cosigning a student loan on your credit score is determined by the financial circumstances and planning of the student borrower when paying back the loan.
First, any potential cosigner should understand that the student loan application process often involves a hard credit check, also known as a hard inquiry. A hard inquiry is triggered when a lender reviews your credit score to help assess your creditworthiness. This activity will have little to no short-term impact on your credit score. However, too many hard inquiries over a short period can raise a flag to lenders that you are seeking to borrow beyond what you can pay back.
In the long-term, determining whether cosigning a student loan will impact your credit score depends on whether the student loan payments are made. If the loan payments are made on time, and the loan is paid back by the required date, the cosigners’ credit score may even improve. Cosigning can help the student borrower and cosigner build credit if they have little or no credit history.
On the other hand, if payments are late or the loan defaults, the student borrower and the cosigner will see this reflected on their credit report. In addition to negatively impacting your credit score, as a cosigner, you may be exposed to long-term financial and potential legal consequences should the lender or debt collectors attempt to collect the unpaid debt.
Other than the potential impact on your credit score, there are other financial implications of cosigning a student loan. It is important to note that there is no special classification for cosigned student loan debt on your credit score—the borrowed amount will show up as debt just as if you took out the loan yourself. This means that the loan amount will be factored into your debt-to-income ratio, which can affect your creditworthiness until the loan is paid down or off completely. If you are considering cosigning, consider how this debt could impact your future financial opportunities, such as your ability to take out other loan types, like an auto or home loan.
Requirements for Cosigning a Student Loan
Each student loan provider may have unique requirements regarding who is eligible to cosign a student loan, which may vary by loan type. For example, a lender may have stricter requirements for cosigners of loans above a certain amount. However, there are some common requirements that a student loan cosigner usually needs to meet.
- U.S. Citizenship – Many U.S.-based lenders require cosigners to be U.S. citizens or permanent residents.
- Age Requirements – Most lenders have age requirements for cosigners; usually, you must be at least 18.
- Good Credit History – All lenders require that cosigners meet or exceed a minimum credit score; larger loans may require a higher credit score.
- Stable Income/Employment History – Lenders often require cosigners to have a verified stable income and employment history.
- Low Debt-to-Income Ratio – Most lenders will require student loan cosigners to have a debt-to-income ratio that does not exceed a maximum amount.
- Responsible Financial Management – Lenders often look at the cosigner’s overall financial responsibility, such as their history of making a timely loan or credit card payment.
- Meeting Requirements Over Time – Many lenders will require that the cosigner not only meet other requirements but have met them for a sustained period, for example, two years.
- Relationship to Student Borrower – Although this is not a common requirement, most cosigners are family, including parents and close friends.
Benefits of Being a Student Loan Cosigner
While inherent risks are associated with being a student loan cosigner, there are also potential benefits that may make this decision worthwhile. Some notable benefits of becoming a cosigner include:
- Facilitating Access to Education – By cosigning a student loan, you play a crucial role in helping someone pursue their education. Access to higher education can open doors to better career opportunities and personal growth for the student borrower.
- Building or Enhancing Credit History – As a cosigner, you contribute to establishing or improving the student borrower’s credit history. Timely repayments can positively impact both the student borrower’s and your credit scores, potentially leading to better financial opportunities in the future.
- Fostering Financial Responsibility – Acting as a cosigner provides an opportunity to mentor and guide the primary borrower through financial planning. By sharing the responsibility, you can impart valuable lessons about budgeting, responsible spending, and meeting financial obligations.
- Potential for Favorable Loan Terms – Your involvement as a cosigner may help secure more favorable loan terms, such as lower interest rates or more flexible repayment options. This can ease the financial burden on the student borrower and create a more manageable repayment plan.
Risks of Being a Student Loan Cosigner
There are several risks involved in being a student loan cosigner. Some of the most important things you need to be aware of and look out for include:
- Full Obligation to Cover the Debt – As a cosigner, you are equally responsible for repaying the full amount of the loan. If the student borrower fails to make payments or defaults, you are legally obligated to cover the debt, which can have long-term financial implications.
- Negative Impact on Your Credit Score – Being a student loan cosigner can negatively impact your credit. The impact can be especially massive if the student borrower misses payments or defaults.
- Difficulty in Removing Yourself from the Loan – Depending on the lender, it can be a difficult process to remove a cosigner from a student loan, even if the student borrower has established good credit.
- Potential Legal Challenges – If the student borrower defaults on the loan, the lender can take legal action against the cosigner. In some cases, this could even result in wage garnishment or legal judgments.
What Is a Cosigner Release?
A cosigner release is a provision included in some student loan agreements in which the cosigner may be removed from the loan responsibility after meeting specific qualifications. These terms will vary by lender but generally include an analysis of the student borrower’s payment history and qualifications as a solo borrower. The cosigner may be released from the loan once the student borrower meets these conditions and other required terms. If the lender approves the cosigner release, the cosigner is no longer obligated to repay the debt.
Having the option of being released from the cosigner obligation reduces the long-term financial risk for the cosigner, as they will no longer be responsible for the financial consequences should the student borrower default on the loan. For example, Ascent borrowers can apply for cosigner release after making the first twelve consecutive, regularly scheduled payments and meeting other eligibility criteria.
Learn More with Ascent
From applying to college and beyond, Ascent supports students and their families with financial wellness resources and college loan options to help you achieve your financial goals. Learn more about our cosigned student loan options or contact us today for more questions about cosigning a loan from Ascent Funding.
Whose credit is affected on a cosigned loan?
The student borrower’s and the cosigner’s credit are impacted when applying for a cosigned student loan, but they do so differently. The student borrower is primarily responsible for making timely payments and managing the loan. If the student borrower does so, their credit score will improve, as will the cosigner’s. If the student borrower misses payments or defaults on the loan, their credit score will be negatively impacted, as will the cosigner’s. However, the cosigner can make loan payments anytime to prevent a missed payment.
Can you remove yourself as a cosigner?
Whether or not you can remove yourself as a cosigner from a student loan depends largely on the terms of the specific loan and the lender. Removing yourself as a cosigner from a student loan may be difficult unless the lender offers a cosigner release option.
How do I protect myself as a cosigner?
You can protect yourself as a student loan cosigner in many ways. Some of the most effective and important include:
- Understand all terms of the loan
- Communicate openly and regularly with the student borrower about the loan and their financial situation.
- Review any cosigner release provision in the terms of the loan.
- Regularly monitor credit reports.
- Set up payment alerts.
- Maintain an emergency fund to cover payments.
- Know your rights and responsibilities as a cosigner.
- Encourage responsible borrowing.