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How will Co-Signing Student Loan Affect My Credit / and Score

Moderator Emeritus

Re: How will Co-Signing Student Loan Affect My Credit / and Score


TeeandDee wrote:

Well, I just do not see how co-signing and making on time montlhly payments can negatively affect my credit years from now.........  I can see co-signing and relying on someone else to make the payments could negatively affect credit....  but I clearly stated in almost each post that I would be making the payments. So I do not see how co-signing in that situation will harm my credit for years to come.


 

Here's how your credit will be affected by cosigning your kids' student loans:

 

1. New accounts: there could be several.  Some people have reported that for each school year or even each term (quarter, semester, trimester), a new student loan account is generated.  So, over the course of a 4 year college education, you could end up with several new student loan accounts on your credit reports.  Along with these new accounts will be new credit inquiries, which may also have a small negative effect on your FICO score.

 

2. Decreased average age of accounts: with multiple new accounts reporting, your AAoA will be progressively diminished.  It may take a while for this to recover.

 

3. Increased credit mix: if there are no other student loans on your credit report, then adding these could be a positive factor.  Also, if you have no other open installment accounts, then these new installment accounts could be beneficial.  Please note the use of the word "could".

 

4. Increased debt obligation: the student loan payments will be factored into your debt-to-income ratios when you apply for future credit.  I don't recall the exact details about student loans in deferment, but once payments start coming due then they will be included in your DTI, unless you can prove that your children are making the payments (which, as you have said, won't be the case).

 

5. Number of accounts with balances: the FICO scoring model doesn't like to see a lot of accounts with balances.  However, not all accounts are treated the same way.  There's difference in scoring between having 10 credit cards with balances and 10 student loans with balances.  Personally, for a while I had about a half dozen student loans with balances on my report (along with about 4 or 5 credit cards with balances), and I still had a score around 800.  But my student loans were my oldest accounts at the time (opened starting in 1987).  This problem can be solved by consolidating the loans into a single loan, which is what I eventually did.  However, there was no discernible effect on my FICO score when I reduced my student loans to a single account.

 

6. Amounts owed on installment loans: again, different types of installment loans are treated differently by the FICO scoring model (e.g. having a new mortgage doesn't cause one's score to plummet).  Furthermore, the amount owed on installment loans as compared to the original loan balance is not as big a factor as the amount owed on revolving accounts (i.e. credit cards).

 

 

The biggest potentially negative factor of co-signing student loans - the nonpayment of the loans - does not appear to be a factor in your case, since you have stated that you and your spouse will be solely responsible for the payment of these loans.  That is, you don't have to worry about your kids forgetting to make a payment.  You just have to make sure that you don't forget to send in the check(s) when they payments are due.  Automatic payments are your friend (and in some cases, might qualify you for an interest rate reduction if you consolidate).

Message 21 of 26
Frequent Contributor

Re: How will Co-Signing Student Loan Affect My Credit / and Score


Lel wrote:

TeeandDee wrote:

Well, I just do not see how co-signing and making on time montlhly payments can negatively affect my credit years from now.........  I can see co-signing and relying on someone else to make the payments could negatively affect credit....  but I clearly stated in almost each post that I would be making the payments. So I do not see how co-signing in that situation will harm my credit for years to come.


 

Here's how your credit will be affected by cosigning your kids' student loans:

 

1. New accounts: there could be several.  Some people have reported that for each school year or even each term (quarter, semester, trimester), a new student loan account is generated.  So, over the course of a 4 year college education, you could end up with several new student loan accounts on your credit reports.  Along with these new accounts will be new credit inquiries, which may also have a small negative effect on your FICO score.

 

2. Decreased average age of accounts: with multiple new accounts reporting, your AAoA will be progressively diminished.  It may take a while for this to recover.

 

3. Increased credit mix: if there are no other student loans on your credit report, then adding these could be a positive factor.  Also, if you have no other open installment accounts, then these new installment accounts could be beneficial.  Please note the use of the word "could".

 

4. Increased debt obligation: the student loan payments will be factored into your debt-to-income ratios when you apply for future credit.  I don't recall the exact details about student loans in deferment, but once payments start coming due then they will be included in your DTI, unless you can prove that your children are making the payments (which, as you have said, won't be the case).

 

5. Number of accounts with balances: the FICO scoring model doesn't like to see a lot of accounts with balances.  However, not all accounts are treated the same way.  There's difference in scoring between having 10 credit cards with balances and 10 student loans with balances.  Personally, for a while I had about a half dozen student loans with balances on my report (along with about 4 or 5 credit cards with balances), and I still had a score around 800.  But my student loans were my oldest accounts at the time (opened starting in 1987).  This problem can be solved by consolidating the loans into a single loan, which is what I eventually did.  However, there was no discernible effect on my FICO score when I reduced my student loans to a single account.

 

6. Amounts owed on installment loans: again, different types of installment loans are treated differently by the FICO scoring model (e.g. having a new mortgage doesn't cause one's score to plummet).  Furthermore, the amount owed on installment loans as compared to the original loan balance is not as big a factor as the amount owed on revolving accounts (i.e. credit cards).

 

 

The biggest potentially negative factor of co-signing student loans - the nonpayment of the loans - does not appear to be a factor in your case, since you have stated that you and your spouse will be solely responsible for the payment of these loans.  That is, you don't have to worry about your kids forgetting to make a payment.  You just have to make sure that you don't forget to send in the check(s) when they payments are due.  Automatic payments are your friend (and in some cases, might qualify you for an interest rate reduction if you consolidate).


+1

 

Thank you so much for this information, some very good points and much I need to keep in mind in making this decision especially the ones I highlighted....Food for thought.  Thanks so much! Smiley Happy

Slowly building....
Message 22 of 26
Blogger

Re: How will Co-Signing Student Loan Affect My Credit / and Score


Lel wrote:
You just have to make sure that you don't forget to send in the check(s) when they payments are due.  Automatic payments are your friend (and in some cases, might qualify you for an interest rate reduction if you consolidate).


And if you do set up automatic payments, make sure you check every month to see that they are actually going through. I've witnessed multiple horror stories about an automatic payment for a student loan not going through for various reasons, and the person not finding out until months later.

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Message 23 of 26
Moderator Emeritus

Re: How will Co-Signing Student Loan Affect My Credit / and Score


FrugalRican wrote:

Lel wrote:
You just have to make sure that you don't forget to send in the check(s) when they payments are due.  Automatic payments are your friend (and in some cases, might qualify you for an interest rate reduction if you consolidate).


And if you do set up automatic payments, make sure you check every month to see that they are actually going through. I've witnessed multiple horror stories about an automatic payment for a student loan not going through for various reasons, and the person not finding out until months later.


Very, very good point.  This advice applies to any account for which you have automatic payments.  I've had problems with a couple CCs, mobile phone accounts, and my utilities bill.

 

Message 24 of 26
Highlighted
New Contributor

Re: How will Co-Signing Student Loan Affect My Credit / and Score

Hmmm...They shouldnt need a co-signor unless going for parent plus loans.  I would double check the financail aid options before doing so.  Although, bravo, for being supportive of their educaiton.  My parents did that for me.  (Undergrad only, grad and law was all on me Smiley Sad )  And often you dont need credit established for subsidized and unsub.  So alot of this seems off to me.  I just completed my FAFSA for the summer and fall, and had taken out loans since I was 16 (I went to college early and I got loans by myself, that are mine, I cant shake em...haha)  good luck. 


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Message 25 of 26
Frequent Contributor

Re: How will Co-Signing Student Loan Affect My Credit / and Score


FrugalRican wrote:

Lel wrote:
You just have to make sure that you don't forget to send in the check(s) when they payments are due.  Automatic payments are your friend (and in some cases, might qualify you for an interest rate reduction if you consolidate).


And if you do set up automatic payments, make sure you check every month to see that they are actually going through. I've witnessed multiple horror stories about an automatic payment for a student loan not going through for various reasons, and the person not finding out until months later.


Thank you and I will certainly keep this in mind.  I'm a freak when it comes to checking my credit cards daily and also double checking to make sure payments go through on time that I've set up, so I'll be sure to stay on top of that!

Slowly building....
Message 26 of 26