Why can’t I refinance my student loans? Why was I rejected? If you’re eager to get your hands on the benefits of refinancing but can’t get approved, you’re probably looking for answers.
After all, under the right conditions, refinancing your college debt can be a complete game-changer. You can combine your loans — private, federal or both — and maybe get a better interest rate as well, which could potentially save you thousands of dollars over the life of your loan.
But unfortunately, refinancing isn’t guaranteed. You need to be approved by a private lender first. And if you don’t meet the eligibility requirements, the lender could reject your application.
Here are some of the most common reasons you might get rejected for refinancing your student debt, along with tips on how to improve your chances.
1. Your income was too low or unstable
One reason a refinancing lender might reject you is your income. Lenders want to know you’ll pay back your debt, and one of the greatest indicators they have is how much you earn.
They look for a decent, steady income. Being unemployed, having a low-paying job or an income that varies greatly from month to month could be the reason why you can’t refinance your student loans.
But even if a lender thinks your income is too low, there’s still hope. If you need to boost your application, you could apply with a cosigner. Cosigners are usually someone with which you have a close relationship, such as a parent or spouse.
If you miss payments or are otherwise unable to repay your debt, your cosigner will be legally responsible for doing so. But if you make consistent on-time payments, the lender might eventually allow you to release your cosigner from the loan.
In the meantime, you could also try to boost your income. Whether you search for a new job or set up a side hustle, increasing your earnings could boost your chances of approval.
2. Your debt-to-income ratio was too high
Beyond your salary and wages, lenders also look at your debt-to-income (DTI) ratio. To calculate your DTI, add up all your monthly debt payments (such as those for a car loan, mortgage or student loan) and divide that sum by your gross monthly income (your income before taxes and deductions). If your debt payments add up to $1,000 a month, for example, and your gross monthly income is $4,000, then your DTI would be 25%.
Lenders are looking for a low debt-to-income ratio for student loan refinance candidates — typically around 40% or less, but each lender will have its own specific requirements. Even if you’re making six figures, it’s possible you may not qualify for refinancing if much of that money goes to debt payments.
Again, applying with a cosigner could make your application stronger. If a creditworthy cosigner has your back, you won’t seem like such a risky candidate for refinancing.
You should also strive to pay down your debts as quickly as possible. If you have credit card debt, for instance, consider switching to a card with a lower interest rate. The quicker you lower your DTI, the sooner you’ll get approved for refinancing.
3. Your employment history was too short
You’re so much more than your job, but on paper your job and employment history play a big role in whether you get approved for refinancing. Most lenders ask for proof of employment or a job offer letter. They want to see that you have a stable job now and that you’ll continue to have one in the future.
If you don’t have steady work yet, hold off on applying until you do. Make the job search a priority over refinancing. Once you’ve established a steady source of income, you can try applying for student loan refinancing again.
That’s not to say those with variable incomes, such as freelancers or other self-employed workers, can’t refinance. If that describes you, you’ll need to provide sufficient paperwork to show you’re bringing in money every month. That way, the lender will see that you make enough to pay back the loan, even if your earnings fluctuate from time to time.
4. Your repayment history showed missed payments
Have you ever missed a payment on any of your loans? No matter how careful we are, we all make mistakes. Unfortunately, that late payment will likely show up on your credit report.
It has been said that the past is the greatest indicator of the future, and prospective lenders adhere to this theory. Even a one-time mistake could blemish your repayment record.
Some lenders are more forgiving than others, but most look for borrowers who can manage their payments and make them on time. So if you’ve missed payments in the past, you’ll be more likely to get rejected for refinancing.
But even though late payments typically stay on your record for seven years, you can take steps to improve your credit during this time. Paying down debt and making on-time payments can help your credit bounce back.
5. Your credit score wasn’t strong enough
Your credit score is essentially the GPA of your creditworthiness — it’s a numerical value that lenders use to evaluate your risk as a borrower.
Your payment history, your credit utilization (how much you use out of your available credit), the length of your credit history, your credit mix and new credit all affect your score. If you missed a few payments or consistently charge your credit cards up to the limit each month, you might be considered a risk.
To qualify for student loan refinancing, you need a good credit score. But what credit score is needed to refinance student loans? Most lenders want to see a score of 680 or above. Popular refinancing lender SoFi will consider applicants with a score of 650 or higher.
You can monitor your credit score with a free service such as My LendingTree (note: LendingTree is the owner of Student Loan Hero.) You can also go to AnnualCreditReport.com and request one free credit report a year from each of the three major reporting agencies. If you spot any errors, make sure to dispute them and get them removed from your report.
If you continue to make on-time payments toward your debt, your credit score will increase over time. By building up to the credit score needed to refinance your loans, you’ll have a better shot at being approved for refinancing.
Why can’t I refinance my student loans? Find the problem so you can fix it over time
So, why can’t you refinance your student loans? Low income, weak credit and a high DTI ratio are among the most common reasons why you’d get rejected for refinancing. But by being proactive about your finances, you can improve your chances for approval.
If a lender rejects your refinancing application, try applying with other lenders. Each lender sets its own requirements, so even though you get a “no” from one, another could say “yes.”
If you’ve been rejected for student loan refinancing, try to pinpoint the specific reason. Then do what you can to fix the problem, whether that involves pursuing a new job or getting back on track with debt payments. In the meantime, continue to research student loan refinancing lenders to find one that’s the best fit for you.
Rebecca Safier contributed to this report.
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