We’ve all heard stories from older generations about how they paid their way through college by working part-time as a waiter, but gone are the days when tuition was that affordable. According to the National Center for Education Statistics, from the 2006–2007 to the 2016–2017 academic year, the cost of attending college increased by 31% at public institutions and 24% at private schools (factoring in inflation). It’s no wonder so many students and families turn to loans to help cover their college costs. Let’s take a look at the nature of student loan debt and why having debt in your name doesn’t have to be all bad.
Higher tuition, more debt
With the increase in tuition costs, you may find yourself as one of the millions of Americans who must borrow money to attend college. The student debt numbers for 2020 aren’t good: for the Class of 2019, a whopping 69% of college students graduated with student loan debt—and the average amount owed was $29,000.
Your first step should be to fill out the Free Application for Federal Student Aid (FAFSA), which will help you determine how much federal money you’re qualified to receive. Federal loans require your parents’ or guardians’ financial information, but they typically don’t require them to be a cosigner. In other words, federal loans can be in your name alone. Private loans, on the other hand, can be taken out by parents alone, but if the student wants their name on them, they typically require the parent to be a cosigner. That’s because credit scores and history are factored into the approval process for private loans, and college students usually haven’t had a chance to establish credit yet. The thought of cosigning on a loan with your parent or taking one out may make you nervous, but consider how it can actually help you in the long run.
5 reasons to carry student debt in your name
When you graduate from high school, it’s likely you’ll have little to no experience with credit or debt. Your parents may have already helped you or will help you get a credit card, but the thought of taking out a loan that you’re responsible for can feel intimidating. It's a huge responsibility, but having your name on your student debt can offer some benefits:
1. It helps you build or improve your credit
The sooner you begin to establish a strong credit history, the better. Not only will it impact your future approval for loans and credit cards and your interest rates on them, but it’s also often considered by landlords, employers, and utility companies. It can even affect how much you pay for car insurance (better scores often get lower rates). When you have a loan account in your name and make payments on time, you’re getting your credit off to a great start, especially since on-time payment history is the biggest component of your credit score. Plus, having a mix of credit accounts can help increase your score, so if you have both a loan and credit card, this diversification can also help you establish a solid credit history.
2. You can get perks from having a cosigner
Private lenders typically require cosigners with established credit. In this situation, both you and your parent or guardian both have your names on the loan. If you have a cosigner and they have a strong credit history, you can qualify for a lower interest rate than if you were the only one on the loan. Just be aware that when you have a cosigner, any late or missed payments will affect their credit report too, so it’s a huge act of trust on their part, and you should be on top of making consistent payments. Oftentimes, once you have established your credit after graduating, loan servicers will let you remove a cosigner so you can have full responsibility over the loan.
3. You can refinance later if needed
Interest rates on federal loans are set by the government, but private lenders choose their own rates—which can be variable and more expensive than federal loans. But here’s the good news: if you get stuck with high interest rates on your loans, it’s possible for you to refinance them later on, which lets you convert your debt into a new loan with lower interest. This can be easier once you’ve had time to establish credit history in your name, since better credit will, as always, equal lower interest rates.
4. Bundling services could provide lower interest rates
Some financial institutions offer deals for customers who use multiple services they provide. For example, if you have a checking account with Wells Fargo, they’ll offer a discount of .25%–.50% on interest rates for new student loans. By having multiple financial accounts, you’ll enjoy perks like this and others.
5. You’ll learn through experience
Let’s pretend you’re attending college and your parents are handling your loans and taking care of all your bills for you. Not only will you miss out on a chance to kick-start your credit history, but you may feel ill-prepared to start paying your own bills responsibly when you’re on your own after graduation. You may not be sure how everything works or not be used to paying bills monthly, and if you forget to make payments, you’ll end up with fees and damage to your credit score. But if you have loans in your name during school, you’ll learn these life skills sooner while under the safety and assistance of your parents. So by the time you head off into the world by yourself, you’ll already have built healthy habits of paying bills on time and understand the repercussions if you miss payments.
Your name means your responsibility
Taking out student loans in your name comes with significant responsibility—the most important being making payments each month. To repeat: your payment history is the single most important factor in your credit score, meaning late or missed loan payments can do major damage to your credit score and cause negative ripples throughout your life. Also keep in mind that if your parent is a cosigner, any missteps with your loans can harm their credit too.
On the flip side, if your student debt is in your name and you make payments on time, this positive repayment history will help you establish credit early on. It’ll help you build a strong credit history, which will pay off after graduation as you begin looking for housing, jobs, and big purchases like cars, which often require personal loans to kick-start your adult life.
For more valuable advice like this, check out the blogs and articles in our Financial Aid section.