How Student Loans Can Impact a Your Whole Family’s Credit

Millions of college kids and their families are now making the final preparations for those kids to head back to campus for another school year. However, that annual tradition may now also be growing into something of a financial headache for many Americans, regardless of whether they're attending school themselves, or the parents or even other relatives of these students.

Recent polls suggest that families are now at least trying to get out in front of the potentially massive costs that college presents, as close to seven in 10 say that those with kids 18 and under have now begun saving for college, according to a report from CNNMoney. However, most are also preparing to pay an average of 62 percent of their college costs, with the remaining 38 percent coming from financial aid, student loans, and the like. The most recent cost expectations are up from 57 percent just a year ago, and today the average family has saved roughly $5,000, only about one-third of their expected college costs.

The problem for many families, too, is that college costs are continually rising, the report said. Tuition to private college rose about 4 percent in the last year, but was just half of the 8 percent spike for public institutions, and consequently, more than half of all families say that they might have to send children to more affordable but potentially less desirable schools as a means of saving money. Others may ask their kids to live at home and commute to school, rather than live on campus, take more online classes, and so forth.

What this can mean for families and students alike
These trends may be troubling for college students and their parents, but the fact of the matter is that these new realities for higher education aren't likely to go away any time soon. For this reason, it might be simpler for you to look into as many student loan options as possible to help you cover either your own college costs, or those of your children. This type of financing, available from both the federal government and private lenders (though in the latter case with far less repayment flexibility upon graduation), can help to make college life more affordable. However, it's important that students and their families alike be aware of the ways in which taking advantage of them can have a negative impact on all of their credit standings.

Simply put, taking on student loans will likely add tens of thousands of dollars to a young person's debt load by the time they graduate, and sometimes, depending on where they went to college, that amount can stretch into the hundreds of thousands. Obviously, that kind of financial burden can create significant problems for these kids once they leave school and enter the real world, as they will likely have to make sizable monthly contributions to these balances or else risk falling behind, and seeing their credit scores — of which 35 percent is made up entirely of a borrower's ability to make all payments on time and in full — take a potentially large tumble.

The reason this might also impact their family members' credit is that in some cases, parents co-sign on their kids' student loan balances. That means that they will be considered equally responsible for those balances and payments as their kids' are, even though they have relatively little to do with the debt apart from helping their kids sign up for it.

So what can you do?
When you're worried about these issues, either before taking on the debt at all or after graduation, you need to do all you can to explore your various paths for dealing with the student loan balances you might accrue. For instance, with federal loans, if you or your child are concerned about the ability to repay potentially hundreds of dollars per month upon graduation, it might be wise to look into options to reduce those burdens, including deferments or income-based repayment schedules that will keep costs as limited as possible.

When dealing with privately-issued student loans, however, there are typically far fewer methods for reducing these costs, and thus that could seriously endanger the finances – and good credit score – of both a young person and his or her parents. It's for this reason that you should try to rely on private student loans only as a last resort, because it could otherwise make it far more difficult for a recent graduate to achieve financial independence soon after leaving school.

Students and parents alike who want to protect their credit standings may also want to regularly order copies of their credit reports and check them over closely for any potentially unfair markings. If any such entries are discovered, it might be helpful to work with a credit repair law firm, which may help to sort out the issue.