How Will a Child's College Loans Affect a Parent's Credit Rating?

A parent may not think twice about co-signing a student loan to help his child finance a college education, but this could have significant consequences for the credit ratings of the child and the parent. On the other hand, this might help the child begin to build a credit history when he graduates. However, the parent should be prepared to repay the loan if he put his name on it.

Identification

A college loan only affects the parent's credit rating when one or both parents put their names on the promissory note, called co-signing. Once the parent co-signs the loan, the history on the account appears on the credit reports of anyone who signed the document. Often this is a necessary step with private lenders, because they typically require a score of at least 630 to approve a loan for a single borrower, according to the FinAid website. Federal loans almost always require the parent to co-sign the promissory note.

Benefit and Drawback

Co-signing a college loan boosts the parent's credit rating over time if the parent and child meet the agreed upon monthly payment for each billing period. The initial loan application and added debt burden of a student loan usually cause the borrower's scores to drop initially. However, this effect disappears once the account holders establish a good payment history, which may take up to six months. Any negative items, such as a missed payment, bring down the scores of the parent and child.

Considerations

Lenders consider more factors than the credit score when making future lending decisions for the parent. A person's monthly debt compared to his monthly earnings, called a debt-to-income ratio (DTI), carries as much weight as a credit score. The DTI shows the lender the parent's ability to pay a debt, while credit scores indicate his willingness to pay. According to the Moolamony website, most creditors require a DTI of no more than 36 percent, including the monthly payment for the potential loan. Some lenders may accept a DTI higher than 36 percent, however. The Federal Housing Administration, for instance, allows a DTI up to 41 percent, according to Real Estate ABC. Student loans can be for large sums -- sometimes hundreds of thousands of dollars -- which can cause the DTI to rise dramatically.

Tip

The child should seek a loan on his own before involving the parent. Federal loans require a co-signer, but not if the parents have bad credit. Private lenders often set aside a certain amount of loan money for college financial aid offices to let them award loans regardless of the borrower's credit score. If the parent must co-sign a loan, he may try to refinance it when the child is able to qualify for a loan on his own and take full responsibility for the debt. This is the only way to remove a co-signer from a promissory note.