Does Cosigning a Student Loan Affect My Credit?

Cosigning is a popular practice in the world of private student loans. Most students do not have sufficient enough credit histories to qualify for competitive private loans on their own, which is why a cosigner steps in to help. However, at this point you may be wondering, “does cosigning a student loan affect my credit?”

If your child, relative, or close friend ask you to cosign for a private student loan, be informed before making a decision. Cosigning a private student loan is a hefty decision to make, and there are ways it could hurt your credit.

What is a Private Student Loan Cosigner?

A private student loan cosigner is an individual who agrees to sign onto a private student loan alongside the borrower, often in cases where the borrower can’t qualify for the loan or receive favorable terms on their own.

Because cosigners are equally responsible for repaying the loan, any missed payments by the primary borrower ultimately become the cosigner’s responsibility. Likewise, if the primary borrower causes the loan to go into default, you are responsible for the loan as the cosigner. 

In the 2019-2020 academic year, 92% of private undergraduate student loans and 63% of private graduate student loans were cosigned. 

>> MORE: What is a private student loan cosigner?

Why Would a Cosigner Be Necessary?

In many cases, students are unable to qualify for private loans or receive favorable loan terms without a cosigner. In short, private lenders want to know that they will be getting their money back when lending to people. So, due to students’ limited credit history, often due to their age, students can be risky investments for lenders. By tacking on a cosigner with a strong credit history to a student loan, lenders can be more confident that their money will be returned in full over time.

>> MORE: How and where to get private student loans for bad credit:

A student with a cosigner is more likely to repay their loan on time and in full as opposed to a student without one. So, with a cosigner, the chance of receiving the best possible private loan is significantly higher.

Unlike private student loans, federal student loans do not require a cosigner. Students are able to borrow loans that they qualify for based on their Free Application for Federal Student Aid (FAFSA) application. 

However, if a student is looking to take out a private student loan, a cosigner will almost always be necessary. 

>> MORE: Can you get an international student loan without a cosigner?

Does Cosigning Hurt My Credit?

Cosigning a student loan can affect your credit both positively and negatively. Consider the advantages and drawbacks before making the decision to cosign. 

How It Hurts Your Credit

#1: A Hard Inquiry

When you cosign a private student loan, most private lenders will request for a hard inquiry, or access to review your credit report. Hard inquiries can hurt your credit score by up to 10 points, though the damage is only temporary.

While a hard inquiry will only lower your credit score temporarily, it is important not to open too many credit lines at once. Having multiple hard inquiries can lower your credit score significantly and may seem like you are overextending yourself financially, which isn’t appealing to lenders.

#2: Potential Default

If the primary borrower defaults on the student loan, the default will appear on both of your credit histories. Furthermore, your credit score and chances of opening new credit lines will be severely harmed. 

Your loan contract (also known as a promissory note) specifies how many missed payments you can have before your loan enters into default. Before cosigning a student loan, be sure to thoroughly read the loan terms and have a serious conversation with the primary borrower. 

#3: Potential for Late Payments

As a cosigner, you are legally responsible for the loan, just like the primary borrower. If the primary borrower misses a payment or makes late payments, these actions can hurt your credit. Keep this in mind before shouldering this financial responsibility. 

How It Can Help Your Credit

#1: Diversified Credit Mix

10% of your FICO score is made up by your credit mix. If you have multiple lines of credit, this can actually boost your credit score. Make sure to make all your payments on time and in full to remain in good credit standing. 

#2: New Credit Line

Adding a new credit line to your credit history can minimally boost your score. However, it is crucial for the primary borrower to make payments on time and in full so that there are no negative implications for the both of you. 

What Are the Other Risks of Being a Cosigner?

Change in Debt-To-Income Ratio

Private student loan lenders measure a borrower’s credit reliability with the debt-to-income ratio. Your debt-to-income ratio (DTI) is measured by comparing the amount of debt you have to your pre-tax income. 

For example, let’s say that you earn $1,500 every month before taxes. Your car payment, mortgage, and credit card payments total up to $750. 750 divided by 1,500 is .5, making your debt-to-income ratio 50%. 

There are two types of debt-to-income ratios that may be impacted – your back-end ratio and your front-end ratio. Your back-end ratio (all your monthly debt payments divided by your pre-tax income) is considered healthy when lower than 36%. Your front-end ratio, or only your housing expenses divided by your pre-tax income, should be no more than 28%. In general, though, the lower your debt-to-income ratio is, the better it looks to lenders. 

If your back-end DTI is higher than 36%, it’s not recommended for you to cosign for a private student loan. If the student loan is approved, your DTI will only get higher and look more unfavorable to lenders.

Varying Cosigner Release Terms

Some private student lenders offer cosigner release options. This option allows for cosigners to remove themselves from the loan and no longer be liable for it. Generally, a cosigner can be released from the loan if the primary borrower has made a certain number of payments on time and in full. 

If the private student loan you are cosigning does not offer a cosigner release option, you may be locked into the loan until it is fully paid off. The only way around that is if the primary borrower chooses to refinance the loan and does not have you cosign the new loan. 

>> MORE: Should I refinance my student loan?

Commonly Asked Questions About Cosigning a Student Loan 

What credit score does a cosigner need for a student loan?

This varies from lender to lender. As a general rule of thumb, a “good” credit score is at least 670. However, the better your credit score is, the more likely the borrower is to qualify for the student loan. Along with qualifying, the borrower will be more likely to receive a better interest rate if they have a creditworthy cosigner.

>> MORE: What credit score is needed for a student loan?

Do I need to cosign if the student already has a good credit score?

Only 8% of students get approved for private student loans without a cosigner. 

If the student has a strong credit score, you may not necessarily have to cosign for the student loan. However, if the student lacks the credit history needed to originate a loan, they may not qualify for the loan on their own. 

Furthermore, even if the student has a satisfactory credit score, having a cosigner who also has a good credit score and solid credit history will help the student acquire a lower interest rate and other favorable loan terms. 

Does being a cosigner show up on my credit report?

Yes, being a cosigner will show up on your credit report because you are technically opening up a new credit line. Any late payments, defaults, and missed payments will also show up on your credit report. Therefore, make sure that the primary borrower is making their payments on time and in full. 

>> MORE: How to remove student loans from your credit report

Can cosigning a student loan affect me buying a house?

Yes, it is possible that being a cosigner on a student loan will affect your chances of buying a house. Whether you’re looking for a new mortgage or refinancing your current mortgage, it may be difficult to be approved or qualify for competitive terms if you have cosigned a student loan. This is because while the student loan isn’t technically yours, you are still legally responsible for it. Your debt-to-income ratio is also higher with the cosigned loan than without. Accordingly, it can make you a less attractive borrower to mortgage lenders.

Can both parents cosign a student loan?

No, only one person can cosign a student loan. If you’re having trouble deciding who should cosign a student loan, use Sparrow’s free online tool to compare cosigners and make the decision. If you fill out a free application with us, you can see which private student loans you qualify for across all of Sparrow’s partners. In addition to that, you can input the information of potential cosigners and see how they individually impact the loan and its terms. 

>> MORE: Best parent student loans of 2023

Closing Thoughts From the Nest

In short, cosigning a student loan CAN affect your credit. It is a serious decision that can impact both you and the primary borrower’s finances, for better or for worse. Before you sign anything, do your research. Assess whether or not your finances are at an adequate state to be responsible for a private student loan.

If you want to see whether or not you will qualify as a cosigner, use Sparrow’s free online tool. Submit an application today and see what loans the student qualifies for and whether or not you will benefit the loan as a cosigner.