One of the best ways to lower your monthly student loan payment and save money on interest is to refinance your student loans. Refinancing can free up monthly cash flow and help you get your budget under control.
Unfortunately, there’s no guarantee you’ll be approved for student loan refinancing. Your new lender is letting you borrow a lot of money — they want to make sure you can pay it back. Here are some common reasons why you might be denied for student loan refinancing so you can plan ahead and improve your chances.
1. Your Credit Score Is Too Low
Because refinancing involves taking out a new loan, refinancing companies will check your credit score during the application process. Many lenders set minimum credit score requirements at 660 or 680. But even if they don’t require a specific minimum, a low credit score will likely impact your application.
If your credit score doesn’t meet the minimum, take steps to increase it. You can boost your credit score by making all of your credit card and loan payments on time, paying off some of your other debt, and requesting higher credit limits. Also, check your credit report for errors at AnnualCreditReport.com. Incorrect information on your credit report could negatively impact your score; contact the credit bureau right away if you do find errors.
2. You Don’t Earn Enough
While not every lender has income requirements, many prefer to work with applicants who have higher incomes. Some might require that you make at least $24,000 or even up to $75,000 each year to be eligible for refinancing. If you think your income could hold you back from being approved for refinancing, research these eligibility requirements before you apply and get an idea of what to expect. You might want to consider lenders that don’t require a minimum income, such as SoFi or CommonBond. You might also consider getting a second job or starting a side gig so you can boost your income and qualify.
3. Your Debt-To-Income Ratio Is Too High
Even if you earn a high income, you could still be denied if you also carry a lot of debt. Before approving you, lenders investigate your debt-to-income (DTI) ratio. This is the amount of money you pay toward debt each month relative to your monthly income.
For example, if you make $3,500 each month and your monthly debt payments amount to $1,500, your DTI ratio is about 43 percent — that is, 43% of your income goes to paying for a mortgage, car loan, or other debts.
Use a DTI calculator to see how your finances stack up. If a lender thinks your DTI ratio is too high, you won’t be approved for refinancing. Reduce your DTI ratio by paying off some of your debt. If you can quickly pay off a credit card or other loan, you’ll boost your chances of approval. You could also boost your DTI by increasing your income. Find a way to raise your monthly income to $3,800 — that’s $300 more — and you can slip below 40 percent DTI.
4. You Have A Rocky Past
Have you missed a payment here and there on your student loans? In some cases, lenders may not approve you for refinancing if you’ve had a delinquency of 90 days in the last 24 months. If your loans are currently delinquent or in default, you probably won’t be able to refinance your student debt. Other items that can reduce your chances of qualifying for a refinance include tax liens and judgments, as well as foreclosures and bankruptcies. Even after these items stop weighing heavily on your credit score, they can still reduce your chances of qualifying for student loan refinancing. For some negative marks in your past, the only thing you can do is wait until enough time has passed to clear it from your record. So while you wait, make sure you whip other aspects of your finances into shape.
Can You Qualify With A Cosigner?
Don’t think you can fix these issues in time to get the student loan refinancing you need? Another option to consider is enlisting a cosigner to back you up.
This can be a tricky situation; a cosigner (often a parent or close relative) accepts responsibility for your loan. If you miss any payments on your new debt, your cosigner’s credit will be impacted. If you stop paying altogether, your cosigner will be legally responsible for repaying your loan.
However, a cosigner can buy you some time. Get your student loans refinanced, then work on improving your credit and cash flow. When you are in a better financial situation, you may be able to remove your cosigner from the loan, releasing them from the responsibility (it helps to work with a lender who offers cosigner release). While the refinancing process can be tedious, there is hope. Lenders are required to give you information about why you are denied a loan. So if you were denied for refinancing in the past, you can pinpoint the reason you were denied and work on a plan to improve your situation.
And if you haven’t applied for refinancing yet, now you’re armed with the information necessary to increase your chances of approval. Remember, refinancing isn’t for everyone – but if it’s the right choice for you, refinancing can save you thousands of dollars and cut years off repayment.
Originally posted on Forbes