Credit impacts when parents cosign for kids’ student loan debt
Every year, thousands of high school students apply for college with the hope of enrolling at the institute of their choice once they graduate. Although there are certain things that can be done in order to make college attendance more affordable (such as applying for grants or scholarships, or taking on work-study or applying for a tax break), the rising cost of college attendance (the cost of which currently stands at roughly $20,000 and $43,000 for public and private four-year schools, respectively), has pushed student debt levels to record proportions: US student debt currently stands at $1.3 trillion, with an average debt of over $35,000 per person.
Despite the cost and challenges of college attendance, the fact remains that a college degree opens up doors of opportunity and is also seen as a rite of passage from childhood to adulthood. It has also gone from being a nice-to-have to a must-have in order to support even a lower-income lifestyle today. These are the main reasons that parents from lower and middle-income families who have college-bound children and who are unable to pay for a college education find themselves co-signing for private student loans for their children. When they do this, the question now becomes, how does this affect the credit rating of the parents? Is it a worthwhile investment? Are there any alternatives?
By co-signing a student loan, the parents, in essence, agree to take full responsibility for the debt, and the debt appears on the credit report of both the co-signer and the student. Parents who are thinking about buying a home or applying for a mortgage or other loans should keep this in mind before co-signing on a loan for their children because the total existing debt and important loan ratios of the parents will be affected, and this affects their overall credit rating.
A few smart strategies for minimizing any possible negative repercussions from co-signing on your child’s student loan are as below:
- Have the parent with the stronger credit history become the co-signer.
- If you are planning on applying for a mortgage or other loan, apply after as long a gap from the date of co-signing on the student loan as possible.
- Refinance the loan later with the student as the only borrower, thereby removing the co-signer’s obligation to repay the loan.
When taking on student loans, it would be wise to keep the following in mind as well:
- Some schools generate new loan accounts per semester or per year, and these all appear on your credit reports.
- New accounts will also mean it takes longer for your average age of accounts to recover.
- A student loan will be factored into your debt-to-income ratio when you apply for future credit.
- The biggest negative factor of co-signing a student loan is the potential of not being able to repay the loan. If this is the case, you really need to take a long, hard look at the cost of education, the expected long-term return from it, other avenues for financing college attendance, and your overall ability to take on a loan.
Parents put their financial future on the line by co-signing private student loans to help their children achieve the dream of having a higher education. If they are unable to pay, their credit will be ruined, and they can face serious issues from debt collectors.
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