How Does Co-Signing a Student Loan Affect My Credit?

Written by: Kristyn Pilgrim
Updated: 7/22/20

Many students who apply for student loans do not have much of a credit history, which is why a co-signer – someone who is financially responsible – is sometimes necessary to help them get approved for a loan. Depending on how strong the co-signer’s credit history is, the borrower may also be approved for a lower interest rate. Displaying a strong credit history as the co-signer lets the lender know you can be trusted to have the funds to repay the loan if the borrower is unable. 

When you make a choice to co-sign a student loan, you agree to the same responsibilities that the borrower has taken on. Essentially, you are letting the lender know should the student not be able or willing to pay back their loan that you will be the one to repay it. You also take on a financial risk because co-signing a student loan will affect your credit. 

What Is Credit?

A credit report is an overview of your financial information, which lenders use to determine if you are financially responsible. The report includes things like revolving credit utilization, payment history, and any past or present debt, as well as a summary of account and debt totals. 

Negative Effects on Your Credit

Before you decide to co-sign a loan, you need to decide if you are willing to take on the potential risk that your credit score may be negatively affected down the road.

There are a few ways that co-signing a student loan can negatively impact your credit. First and foremost, it’s crucial to understand that the loan will appear on your credit report. It will affect your credit score as if you were the borrower – your signature on the loan implies that you are accepting equal responsibility as the primary borrower. Every action the borrower takes during the repayment process will affect you just as much as it does them. In fact, 35% of your credit score comes from payment history, so if the borrower makes late payments, or misses payments altogether, it will appear on your credit score as though you also missed or made a late payment and could decrease your score.

If late payments are made by the borrower — or you, if it comes down to that — those late payments will appear on your credit report. Despite the loan not being yours, having this reflected on your credit will make it much more difficult to obtain loans or preferred interest rates for your own use in the future. Another thing to note is that even if the student borrower files for bankruptcy, you can still be held responsible for the loan and a lender or collector can come after you for the payments.

Your debt-to-income (DTI) ratio will also be affected when you co-sign a loan. Your DTI compares your total monthly debt owed versus your total monthly earnings. Co-signing a loan could cause a significant increase in your DTI, making lenders less likely to approve you for a loan. The preferred DTI ratio is 36% or less.

Positive Effects on Your Credit

There are some ways that co-signing a loan can have a positive effect on your credit, however. The primary way it can improve your credit is if the student borrower makes all of their payments on time. This is beneficial for them and their credit, as well. Only good things can come from being associated with a loan that is in good standing.

Co-signing a student loan can also help you enhance your credit mix, which accounts for 10% of your overall credit score and is determined by the types of loans you’ve had in the past. Ideally, you want to have a good mix of loan experience, meaning you want your credit mix to include a variety of loans, such as credit cards, student loans, auto loans, and home loans. 

A diverse credit mix could result in an increased credit score. If you have only used credit cards in the past, it could be a strategic move for you to co-sign a student loan, as this will add diversity to your credit mix, therefore increasing your score.

Another positive about co-signing a student loan is that you are helping out a loved one as they embark on their college career. Co-signing a loan can be a meaningful gesture, but in the case that you are not financially able or not willing to take on the potential risk, you can still provide these students with financial guidance for their education. There are many credit repair resources that the student can use to increase or improve their credit so they can apply for a student loan without needing you to co-sign. Here is a list of 2020’s top credit repair companies that you could suggest

Experian also offers a credit boost program that also includes a free credit report and FICO® score. 

Tips to Maintain Your Credit

Co-signing a student loan is a commitment. You are making a personal choice to commit yourself to the student loan borrower, no matter the circumstance. Should you and the student loan borrower have a falling out or cease ties with one another, you are still legally responsible for the loan you’ve co-signed. If this happens, and you’ve experienced changes in your financial situation and are unable to pay back the loan, you could have legal ramifications to deal with. 

If it gets to this point — you become responsible for making payments and aren’t financially able — the lender could start to contact you looking for the overdue and missing payments, and could eventually sue you. 

To avoid any potential damage to your credit or falling into further financial pitfalls, there are a few things you can do to ensure you maintain your credit standing.

  • Keep track of the loan. The bills will not automatically come to you, so you need to stay informed. Sign up for alerts and updates from the lender and regularly check in with the student borrower about the loan. When you co-sign a loan, it’s as though you have started a partnership with the borrower, so communication is key for success.
  • Request duplicate copies of all statements for your records and don’t hesitate to question anything that might not look right to you. Addressing a problem right away can avoid potential disaster.
  • Check your credit score and report every year to see how the loan appears. The Fair Credit Reporting Act (FCRA) allows all U.S. consumers to receive one free credit report per year. 

Additionally, you should find out if the loan servicer offers a co-signer release option that can release you from your legal attachment to the loan at any point. If so, make sure you and the student borrower are well aware of the requirements to be eligible. Some lenders will offer this when the student loan borrower has made a certain number of payments on time and meets other specific credit requirements. You’ll have to contact the lender to find out this information, as it is not normally something you’ll be told upfront.

Do What’s Right for You

Ultimately, the decision to co-sign a student loan is up to you. Ask yourself if you are able and willing to take on the potential risk to help out a student loan borrower. If the student loan borrower is reliable and responsible and makes payments on time every month, your credit will improve. If this is not the case, you could see a negative impact. As the co-signer, you have every right to stay on top of the student loan borrower to ensure they are on track with their payments. By encouraging and monitoring them, you may lessen the chance that the loan will default to you. 

If you are considering taking on this financial responsibility, College Finance is your primary resource for all the information needed to guide you through this specific process. We want you to be able to make an informed decision. And if you need information on other aspects of the college experience, we can help you with that too. We’re dedicated to helping you maximize your college investment with resources for everything from planning, borrowing, and repayment.