How Does Cosigning a Student Loan Affect My Credit?

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If you’ve been asked to cosign a student loan¹, it can be tempting to say “yes” no questions asked. After all, it’s a seemingly easy way to help someone you care about afford college.

But before you cosign on their student loans, there are several things that you need to consider. One of the most common questions is “how does cosigning a student loan affect my credit?’

Key takeaways

• Cosigning a student loan will trigger a hard credit pull, which should affect your credit score by a few points

• As a cosigner, your credit will be affected if the borrower misses payments

• Becoming a cosigner can also mean taking on more debt, which could make it harder to get approved for other loans

How does cosigning a student loan affect my credit?

Cosigning a student loan can negatively affect your credit score and debt-to-income ratio (DTI), making it harder for you to get approved for other lines of credit¹. Here are the three ways you can expect it to impact your credit specifically.

Triggering a hard inquiry during application

When you agree to be a student loan cosigner, the lender will run a hard credit check on both you and the primary borrower. A hard credit check (also known as a hard credit inquiry) is when a lender requests your full credit report, which can temporarily ding your credit score.

A hard credit inquiry shows up on your report and can indicate to other lenders that you’re looking to take out a new loan, open a new credit card or line of credit, or otherwise borrow funds. This is different from a soft check that enables lenders to access your credit score without pulling your full report.

Hard credit checks can stay on your report for up to two years. You can request your credit report from credit bureaus Equifax, Transunion, and Experian to see what inquiries are on your report and when they may expire.

Impacting your payment history

Cosigning a loan for a loved one or student borrower can also impact your payment history, which accounts for 35% of your FICO score.

Missed or late payments can negatively impact scores for both you and the primary borrower. If the borrower can’t pay, it’s the cosigner’s responsibility to make sure all loan payments are made on time and in full.

On the other hand, regular on-time payments by the borrower can actually have a positive affect on your credit score. Make sure that you keep lines of communication with the borrower open so they can let you know if they’ll ever struggle to make a payment.

Increasing your debt-to-income ratio

Your debt-to-income ratio refers to the amount of income you take in on a monthly basis compared to how much is spent on debt.

A lower debt-to-income ratio is better – experts say to shoot for around 35% or lower. This shows lenders that there’s room in your monthly budget to take on more debt, making it more likely you get approved for a new loan, like a mortgage, when you need it.

When you cosign a student loan, the debt legally becomes yours as much as the borrower’s, and it will factor into your debt-to-income ratio until it’s paid off.

What is a cosigner?

The term “cosigner” refers to a second party who agrees to be legally responsible for repaying a debt if the first party fails to do so.

Cosigners are often used in situations where someone is applying for a loan and does not have a sufficient credit history or score to qualify on their own. Lenders use the cosigner’s credit history and score as an indicator of whether the borrower is likely to repay the loan.

Some lenders allow only one cosigner per loan, while others allow multiple cosigners to share responsibility for repaying the loan.

Student loan cosigner requirements

In order to be a cosigner, you must…

• Be the age of majority in your state

• Be a US citizen, permanent resident, or have a valid student visa

• Have a good credit score

• Make a steady income

• and meet other requirements as defined by the lender (here are ours at Earnest*)

Pros of cosigning a student loan

Cosigning a student loan can make funding the borrower’s education possible. But they’re not the only ones who could see benefits from the relationship. Here are a few pros of cosigning a student loan.

Help the borrower afford higher education

Cosigning a student loan can be a great way to help someone you care for access higher education. Compared to their counterparts with only a high school education, college graduates benefit from:

• higher income

• more job security

• a greater likelihood of owning a home

• better job opportunities

• a bigger professional network

• better job perks

• higher lifetime earning potential

Considering all this, you’re not just helping someone get approved for a loan by cosigning; You’re helping them open the door to a potentially more secure and fulfilling career.

Protect the borrower from excessive debt

Cosigning a private student loan can help your loved one secure a lower interest rate than they’d be eligible for on their own. And when even a small difference in interest rate can add up to hundreds – if not thousands – of dollars over the life of a loan, this can mean saving the borrower the significant burden of graduating with excessive debt.

See for yourself: Try Earnest’s student loan calculator to discover how a slight decrease in interest rate can save you a significant sum over the life of the loan.

Diversify your credit profile

Lenders like to see that you can manage different types of debt, so credit scores generally reward consumers for having a good “credit mix.” When you add an installment loan like a student loan to your credit mix, it may improve your score over time provided the account remains in good standing. The diversity of credit in your portfolio makes up about 10% of your overall score.

Extend your credit history

The length of your credit history accounts for about 15% of your overall score. Student loans generally take at least 5 to 10 years to pay off, so providing the primary borrower makes on-time payments, cosigning can help you build your own credit history.

This can help you increase your score, which may make it easier for you to attain your own personal finance goals in the future, such as refinancing your own debt or applying for a mortgage.

Cons of cosigning a student loan

Here are a few reasons why you might want to think twice about cosigning a student loan.

It can hurt your credit

The main risk with cosigning a loan is that any missed payments can reflect negatively on your score. Remember – even though you’re not using the loan funds, legally the debt will be your debt too. And cosigning is a long game — even the most trustworthy student may make a mistake five years from now and miss a payment.

If the situation takes a turn for the worse and the borrower can’t pay the loan even with the help of hardship provisions like forbearance or deferment, you may be faced with a choice between making payments on behalf of the primary borrower or letting your own credit suffer.

You’ll be responsible for the loan in the event they can’t pay

Signing on as a cosigner means that when it comes time for repayment, you’ll be responsible for repaying both principal and interest if they can’t pay their debt. If they defaulted on payments while still enrolled in school, or they lose a job and don’t have enough savings to allocate to their loans, then there’s no way around it: You’re going to be left holding some serious weight on your shoulders.

It can make getting other loans difficult

Cosigning student debt can impact your eligibility for other loans. This is because you’re seen as responsible for the debt even though you’re not using the funds.

Keep in mind that the balance of the loan is calculated in your own debt-to-income ratio for the purposes of determining your eligibility for other loans. This means that if you’re considering applying for a mortgage or other type of loan in the near future, now may not be the right time to cosign a student loan.

Cons of cosigning a student loan

Here are a few reasons why you might want to think twice about cosigning a student loan.

It can hurt your credit

The main risk with cosigning a loan is that any missed payments can reflect negatively on your score. Remember – even though you’re not using the loan funds, legally the debt will be your debt too. And cosigning is a long game — even the most trustworthy student may make a mistake five years from now and miss a payment.

If the situation takes a turn for the worse and the borrower can’t pay the loan even with the help of hardship provisions like forbearance or deferment, you may be faced with a choice between making payments on behalf of the primary borrower or letting your own credit suffer.

You’ll be responsible for the loan in the event they can’t pay

Signing on as a cosigner means that when it comes time for repayment, you’ll be responsible for repaying both principal and interest if they can’t pay their debt. If they defaulted on payments while still enrolled in school, or they lose a job and don’t have enough savings to allocate to their loans, then there’s no way around it: You’re going to be left holding some serious weight on your shoulders.

It can make getting other loans difficult

Cosigning student debt can impact your eligibility for other loans. This is because you’re seen as responsible for the debt even though you’re not using the funds.

Keep in mind that the balance of the loan is calculated in your own debt-to-income ratio for the purposes of determining your eligibility for other loans. This means that if you’re considering applying for a mortgage or other type of loan in the near future, now may not be the right time to cosign a student loan.

Can I be released from my responsibility as a cosigner?

You can be released from your responsibility as a cosigner in two common ways.

The cosigner release

A cosigner release is a legal provision that releases you from liability for the loan. In other words, it removes your name from the loan and makes it the sole responsibility of the borrower.

Not all lenders offer a cosigner release, but those who do generally offer them when certain conditions are met – for example, after a certain number of on-time payments are made in full.

Student loan refinancing

Student loan refinancing is the process of paying off your old student loans with a new loan from a private lender².

So, if the borrower had two loans each worth $10,000 and wanted to refinance both, they would approach a private lender and apply for a $20,000 refinancing loan. If they were approved, the lender would pay off the two $10k loans and issue the borrower the new $20k one.

When the borrower applies to refinance, it should be a time when they can qualify for the loan on their own – usually after graduation when they’ve had time to build credit and secure a steady income.

This not only improves the odds that they’re approved without a cosigner, but also the chances they’re able to secure a lower interest rate on the new refinancing loan, potentially saving them thousands of dollars over the life of the loan³.

When they get approved for a refinancing loan and the old loans are paid off, that ends your responsibility as a cosigner on the old loan(s).

Do parents have to cosign student loans?

While some private lenders may not approve a student borrower without a cosigner, this doesn’t make the student’s parents legally responsible to cosign. When this happens, the student has a few options:

• Try to secure additional federal aid. If the student hasn’t exhausted all their options for federal aid, they should, since most federal student loans don’t require a cosigner. Outside of student loans, other types of aid like grants and scholarships don’t have to be paid back, and should be explored fully before taking on unnecessary debt.

• Find another cosigner. If the students’ parents can’t or won’t cosign, the student has the option of finding another cosigner. As long as the cosigner meets the lender’s eligibility requirements, they can be anyone with a relationship to the student –  like a grandparent, sibling, or even a spouse.

• Find a lender that doesn’t require a cosigner. Not all private lenders require a cosigner. Keep in mind that applying without a cosigner may mean higher interest rates for the borrower.

Alternatives to cosigning a student loan

If you’re hesitant to cosign a student loan, consider these alternatives.

Scholarships

Scholarships are a popular way to get money for school if you don’t want to take out student loans. Many companies and organizations will offer scholarships to students who have good grades or have completed specific programs.

To find potential scholarships for your child, search online, tell your child to ask their advisor about scholarships in the area, or ask his/her college for their own list of scholarships that are available on campus.

Employer sponsorships

Prospective students who are going to school for an advanced degree that will directly benefit their job may be able to get funding from their employer to lower their out-of-pocket education costs.

Some companies have tuition reimbursement perks stated in their handbooks. Smaller companies may not, though a student may be able to appeal directly to their boss or to the owner of the company to make the case for why they should pay for education.

If the borrower or prospective student is a freelancer or runs their own company, they may be able to write off education-related expenses on their taxes, which can lower the net cost of an advanced degree.

If the student you’re assisting is currently considering competing job offers, encourage them to negotiate hard. They can ask their prospective employers for tuition reimbursement and/or student loan payment assistance as part of their compensation package.

Work-study programs

A work-study program gives you the opportunity to earn money for school by working on campus. You do so by earning a paycheck and having it applied directly toward your tuition and fees.

The amount of money you can earn through work-study varies by school and position, but it will generally be enough to cover at least part of your expenses. You can use it to pay for books and other supplies, or save it for emergencies or unexpected expenses.

Encourage the borrower to improve their credit

If someone is asking for your help to cosign a loan for the purposes of refinancing for a lower interest rate, you may suggest helping them create a plan to improve their own credit score so they can apply in a year or two without your help.

Some ways to do this include getting a credit card — and paying it off in full every single month — to establish a history of on-time credit card payments; using a program like Experian Boost to manually add utilities and subscription services to your credit report; and paying off existing debts to lower your debt-to-income ratio.

Learn more about Earnest student loans

If you’re considering cosigning a student loan, it’s important to be aware of the impact that this could have on your credit score. Cosigning can be a great way to help a child or other family member finance their education, but it also entails some risks.

Before signing on as a cosigner, make sure that the borrower has exhausted all other options, and that they understand all their repayment obligations.

Ready to fund your education? Get a free rate estimate with Earnest. It’s fast, free and won’t affect your credit score.

This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

* Earnest private student loans are funded by FinWise Bank, Member FDIC, or One American Bank, member FDIC

1. Before applying for private student loans, it’s best to maximize your other sources of financial aid first. It’s recommended to use a 3-step approach to assembling the funds you need: 1) Look for funds you don’t have to pay back, like scholarships, grant, and work-study opportunities. 2) Next, fill out a FAFSA(R) form to apply for federal student loans. Federal Direct subsidized and unsubsidized loans, excluding PLUS Loan for Parents and PLUS Loan for Graduate and Professional Students which require a credit check and a credit worthy endorser if the parent or graduate or professional student has adverse credit, do not require a credit check or cosigner, and offer various protections if your struggling with your payments. 3) Finally, consider a private student loan to cover any difference between your total cost of attendance and the amount not covered in steps 1 and 2. For more information, visit the Department of Education website at https://studentaid.gov.

2. Please note that you may lose benefits associated with your underlying federal loans, such as federal Income-driven Repayment Plans (an example of which is the SAVE plan), Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options, if you refinance into a private loan. If you file for bankruptcy, you may still be required to pay back this loan.

3. Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for the total cost of your refinanced loan.