College finance can feel like a catch-22: to get credit, and pay for education expenses, you need a good credit history. But when you’re only just becoming an adult, getting a good enough credit score to open the doors to reasonable finance options can be tricky. Federal loans are a very common, and affordable, way for students to pay for college tuition, books, and living expenses. As high as the annual/aggregate value sounds at first, you’ll find it’s a limit that can be all too easily reached. Once a student has taken out the maximum available, they need to look for other ways to pay for their educational costs, such as private student loans.
Parents do have options when it comes to providing additional cash for their child, but most lending from the bank or other credit institutions will require a good credit score to back the application. College students typically haven’t begun to pay their own bills, or if they have, it’s not been for long. So they generally don’t have a long enough history of making timely payments. A credit score tells the lender whether the applicant is likely to make repayments, and for college students, it may be necessary to have a family member cosign on their private loans.
The Benefits Of Cosigning
As with any other financial decision, there are pros and cons that should be carefully considered before deciding. You won’t be the one to directly benefit, so it’s worth weighing the potential good alongside the potential for financial harm before rushing to your decision.
Increased Chance of Approval
Financial lenders are well known to prefer those with good credit. Even neutral credit can be detrimental. If there’s no repayment history at all, lenders can’t be certain the funds will be repaid. Cosigning for a family member shows there will be a responsible party named on the loan who does have a good credit history. Having this makes a big difference when it comes to a loan being approved or denied.
Lower Interest Rates And More Choice
A better credit score usually means more favorable interest rates, as well as having more financial products available to choose from. Without their own credit score, your child can benefit from yours when you cosign. Banks and other credit lenders look to the credit score to check whether they can reasonably expect to recover their investment. If your repayment history is good, there’s a higher chance that the amount will be repaid.
In college, your child is learning how to function in the world as an adult, and it’s the perfect time to teach good habits. A good credit score is needed for almost everything, renting a house, getting a mortgage, negotiating insurance, and buying a car are all much easier when you have good credit. But good credit doesn’t just happen. It’s something that takes work, and making repayments while having the safety net of a family member on the application can help college students get a good start as independent adults.
The Risks of Cosigning
Making any type of financial commitment can leave lasting marks on your credit history, whether it’s better or worse depends on whether the money is repaid. For any other lending, you benefit from the money and it’s your responsibility to repay. With a cosigner, there is another party involved and your credit rating will depend on their actions.
Potential to Impact Your Credit Score
If any repayments are missed, or if the loan goes into default, your credit score will be negatively impacted. Once this damage is done it can be tricky to get your credit back on track, unfortunately it’s much easier to damage credit than it is to repair it.
You Are Responsible
Cosigning is a declaration to the lender that, if the first-named applicant fails to pay, then you will be the one assuming responsibility. If you then also fail to pay, you will find your good credit score ruined. Any missed or late payments will also be held against you when it comes time for you to take out your own lines of credit later.
Reduced Access to Credit
A loan for which you cosign will be included in any debt to income calculations when you apply for your own loans. It may mean you have higher interest rates, or it may mean the maximum amount you can access is lower than anticipated. For some financial products, you may be named on the loan until it is repaid, which can take years. During the lifetime of the contract, you’ll find it more difficult to make large purchases using credit.
Mixing money with family can be a bad idea. Any financial disagreements can become emotionally charged, resulting in a damaged relationship.