Refinancing your student loans has many advantages: a lower interest rate, a lower monthly payment, a combined loan, and the ability to pay off your student loans faster.
This means that over the life of your student loans, you could potentially save up to tens of thousands of dollars.
So you check your new interest rate, prepare your application, assemble your documents and wait for a response.
But then rejection hits and the dream of all those savings quickly fades away.
What do you do after?
You make lemonade. Here’s how to bounce back from a student loan refinance refusal:
Step 1: Diagnose the problem
Refinancing student loans is a great tool to help reduce the financial burden of paying off student loans.
However, obtaining approval for a student loan refinance is not guaranteed. Why? While the federal government provides student loans, the federal government does not refinance student loans. Therefore, if you want to refinance student loans, you should only refinance it with a private lender.
Each private lender has their own eligibility criteria, underwriting requirements, and approval process. If a lender denies your application, the good news is that you can always apply to another lender – or reapply to the same lender – to get approval.
If your request is denied, the lender must provide a reason for the denial. Here are some common reasons for refusal:
Insufficient income: If you are unemployed or on a low income, lenders may question your ability to meet your monthly living expenses, including debts such as student loan repayments.
High debt-to-income ratio: This ratio is expressed as a percentage and measures the amount of your monthly debt payments as a percentage of your monthly income. Lenders understand that you can have other debts such as a mortgage, but they want to make sure that you can pay off your student loan debt, other debts, and living expenses.
Lack of work experience: Many lenders want to make sure you have a stable job, or at least a written job offer. This means that it can be difficult to refinance your student loans while you are unemployed, a student, or a recent graduate without sufficient work experience. However, some lenders will refinance student loans for medical residents or third year law students with a written job offer, for example.
Low credit rating: Lenders want you to demonstrate a track record of financial responsibility. Your credit score is one way to measure your financial health. If your credit rating is too low, you may not be eligible for student loan refinancing. Most lenders require a minimum credit score in the mid-600s.
Step 2: Apply to other lenders
A rejection from one lender does not prevent you from receiving approval from another lender. Remember that each lender has their own eligibility and underwriting criteria. Therefore, you should go to multiple lenders to increase your chances of getting approved and find the lowest rate on your student loans.
Applying for a student loan refinance only takes two minutes to receive your new interest rate.
If you apply to multiple lenders within 30 days, it is usually treated as one request on your credit report.
Step 3: Obtain a Qualified Co-signer
Ask your spouse, parents, grandparents, or someone close to you to co-sign your student loans. Your co-signer should have a strong credit profile and income, and be prepared to be responsible with you for your student loan as well.
Having a qualified co-signer can make the difference between “approved” and “refused”
The good news for your co-signer is that once you’ve been approved to refinance your student loans, many student loan lenders offer a co-signer discharge, which relieves your co-signer of financial responsibility if you and the co-signer can meet. certain qualifications.
Step 4: Check your credit report
Lenders look at your credit report and your credit rating to gauge your financial responsibility.
First of all, you need to understand the elements of your credit report including your unpaid debts, credit usage, payment history, and other parameters. Second, make sure that you have reviewed your credit report for any errors. If there are any errors, you must dispute them.
You can get a free copy of your credit report from all three bureaus (Equifax, Experian, and Transunion) through AnnualCreditReport.com.
Step 5: Consolidate Debt
If you have unpaid debts, you should consolidate your debts into a lower interest rate loan.
For example, if you have unpaid credit card debt, you should consider consolidating debt with a personal loan to lower your interest rate. You may be able to halve your current interest rate with a personal loan.
Step 6: Pay off the debt
Lenders will assess your current debt ratio. One way to improve this ratio is to reduce your debt load.
Your debt-to-income ratio is determined by two factors: debt and income. If you reduce your debt or increase your income (or preferably both), you will improve your debt-to-income ratio. Use a monthly budget to cut expenses and manage your finances. Use the cost savings to make additional debt payments to reduce principal.
If you want to pay off debt and reduce your principal, avoid income repayment plans, which can increase your interest payments over time. Your goal is to reduce the principal of your loan so that your monthly payments go down.
Step 7: increase your income
The second way to improve your debt ratio is to increase your income. Ask for a raise. Find a better paying job. Develop a side business with recurring monthly income. Higher income gives lenders the assurance that you will be able to pay off your student loan debt in full and on time.
It may take work – and time – to improve your financial profile and increase your credit score. However, the investment will be worth it to reap the rewards of student loan refinancing.