Does Cosigning a Child's Student Loan Impact Credit Scores?

To subsidize college expenses, many students borrow money from the federal government or private banks. Although parents are not obligated to help subsidize the costs of their children's post-secondary education, they may voluntarily become cosigners on their children's behalf. Cosigning a child's loan can have negative implications on credit scores. Parents who cosign their children's student loans are responsible for repayment if their children default.

Overview

Students applying for student loans may find they will not qualify for private or federal loans because of their credit scores. Some lenders may also consider a student as a credit risk because of a lack of credit history. In such cases, and especially in an economic environment where lending policies are strict, a lender may require that an aspiring student have a cosigner for a student loan. Usually, the cosigner is a parent. Under the legal doctrine of joint and several liability, a lender has a legal right to demand repayment from a student, his cosigner or both upon default.

Lending Standards and Statistics

According to the Federal Trade Commission, the federal agency responsible for enforcing consumer protection laws, cosigners are responsible for repaying up to 75 percent of the loans they cosign. In most jurisdictions, lenders do not have to seek repayment for their loans from a primary borrower before attempting to collect from a cosigner. Some private lenders, including Sallie Mae student loan lenders, allow students or their cosigners to request a release of liability after 24 months of consecutive and timely monthly payments.

Tips for Cosigning Parents

As a parent who cosigns a child's student loan, you should ensure that you will be able to repay the loan plus any other applicable costs before you agree to become a cosigner. A lender can require you to repay not only the entire principal loan amount, but interest, attorney's fees, and debt collection fees if your child defaults on his loan agreement.

Impact on Credit Scores

The mere fact of cosigning alone -- without any default -- can impact your credit score. The cosigning obligation appears as a pending obligation and affects your debt-to-income ratio. You may not be able to borrow money, receive credit cards, or become eligible for home loans until you or your child repays the original student loan debt. If your child defaults on his student loan, your credit score will almost certainly decrease if you or your child fails to repay the original student loan debt.