Like any kind of loan, a student loan can affect your credit score as the primary account holder or even as the cosigner. Once the repayments kick in, the way you handle them can feed into your credit history and could thus count toward your credit score. You may have heard someone say, “A student loan dropped my credit score,” and that can be a possibility. But this scenario can also be prevented and we’re here to explain how that may work.
When it’s college time for your child, student loans can help with the financing, but there are several choices to consider. For instance, you may want to take out student loans for your child or you could cosign on their own loans. It might help to weigh the potential impact on your credit and your child’s in each student loan scenario. Chase Credit Journey® provides you the ability to see your credit standing, including your score for free.
How does a student loan work?
Student loans are much like any other type of loan. They’re a lump sum of money borrowed from the federal or local government, or a private lender, with an agreed upon repayment schedule and interest rate, for the purpose of paying for college or other higher education and related expenses.
Applying for the student loan
If you decide to take out the student loan yourself for your child, you will apply for the student loan like any other line of credit. Federal student loans for undergraduate students do not require a credit check. However, if you apply for a student loan from a private lender, a hard credit check will be performed. This could have a small, negative impact on your credit score. So, if you see your credit score drop after applying for a student loan, this could be why.
How students receive their student loan
Student loan funds can be dispersed in two ways. The lender may send disbursements to the primary borrower while others can be applied to the student’s school account directly. Lenders may send the funds in one lump sum or in multiple payments, either per semester or by another timeline. Your lender may be able to provide you a projected timeline for more details.
What student loans can cover
Your child can use the student loan funds for tuition, textbooks, housing and the school meal plan. If you have concerns about fund availability for textbooks or other essentials in time for the start of classes, you can contact the school’s financial aid office because they are usually set up to help with personal details like this.
Repaying your student loan
Student loans differ from other types of loans in the timing of their repayment schedules. With a student loan, the required payment schedule usually begins after the student has graduated or is no longer enrolled. But of course, you can kick off that cycle at any time before the agreed upon deadline. This differs from other types of loan repayment schedules. Most loans are typically set up for repayment to begin once the borrower receives the funds.
Does paying a student loan bill build credit?
Paying any credit account, such as a student loan, in a timely manner can help build credit. But some ways of paying your student loan may work better for you and your credit than others. For instance, you may find it's advantageous to start payments before the required schedule starts or consider refinancing after your child graduates. Paying down the balance before the interest rate kicks in may help substantially reduce the total amount you end up paying.
When it comes time to start repayments, it may be helpful to be aware of your credit standing and how the payments could make an impact. Resources like Chase Credit Journey® can help with tools such as credit monitoring and credit activity alerts. These include insights that let you know how your payments can influence your credit report and subsequent score. So, you can learn skills for credit management as you work toward repaying your loans all at once.
What does a cosigner do on a student loan?
As a parent, instead of taking out the student loan yourself, you could cosign on the student loan your child takes out themselves. A cosigner contractually agrees to cover repayment of a loan or credit account if the primary account user doesn’t make the payments. So, once the repayment period starts, the cosigner becomes responsible if the primary borrower doesn’t make the payments. Any payments (on-time, late or missed) become part of the cosigner’s credit history.
Being a cosigner could also help your child qualify for a loan in their own name. Lenders typically consider the cosigner’s credit in addition to the main applicant’s. While students can often qualify for federal student loans on their own, they may need help meeting eligibility requirements for private loans.
Cosign vs. apply for a student loan as a parent
You may be weighing the differences between taking out the student loan yourself or applying with your child as the cosigner. Here are some questions that could help you decide which option is best for you.
Can paying a student loan help your child build credit? Yes. One reason you may choose to cosign rather than carrying your child’s student loans is that, as the primary borrower, your child can start building their own credit. Once they start the repayment process, responsible payments can help your child begin to create a strong foundation for their credit.
Does cosigning hurt your credit? Cosigning can hurt your credit if the primary borrower gets behind in the payments. This could impact your borrowing power as a parent, and it will show as a debt on your credit report. So, if you have concerns about your child’s capacity to make timely and consistent payments, you may prefer to become the primary borrower and manage the repayment yourself. There could also be a negative impact to your credit if a hard inquiry is performed during the application process.
What credit score do I need to cosign a student loan?
Credit qualifications for student loans may vary depending on the lender and loan type. For instance, federal student loans often have less stringent eligibility standards than private student loans. Qualifying for the loan isn’t the end of the story either. You or your child may qualify but also prefer a better interest rate on the loan. Your credit score can help determine that as well.
Knowing your credit score may help you make decisions about how you can help your child with their student loans. With help from Chase Credit Journey® you can take a look at your credit score as a starting point. Then as you work your way through the student loan process and beyond, Chase Credit Journey® tools, such as credit activity alerts and identity monitoring, can assist you in maintaining stronger credit.
Among the many decisions you face when your child heads to college, student loans can give you plenty to consider. You may choose to take out federal or private student loans, and to cosign or take on the loans as a primary borrower. No matter which path you choose, you can prepare yourself for the possibility of a student loan dropping your credit score. With thoughtful planning and Chase Credit Journey®, in your toolkit, you can help your child with a student loan plan that's best for your family.