Refinancing private student loans can be challenging, with few borrowers qualifying for a private consolidation loan. Approval depends on credit scores, income, debt-to-income ratios and other factors. Nevertheless, there are a few steps borrowers can take to increase their odds of being approved to refinance their private student loans.
Borrowers have many reasons for refinancing their private student loans. The most common reasons include getting a lower interest rate and reducing the monthly loan payments. So, the goal of refinancing private student loans may involve more than just qualifying for the loan, but also qualifying for a lower interest rate or monthly loan payment.
Keep in mind that refinancing federal student loans means a loss in many benefits that only federal loans offer. These include an option for potential loan forgiveness, income-driven repayment plans, generous deferment options if you become unemployed or have an economic hardship, and an option to discharge loans for death or disability.
Borrowers may also want to refinance to switch lenders or servicers, to release a cosigner from the repayment obligation, to pay off the debt quicker or to streamline repayment by combining multiple student loans into a single loan. Borrowers of federal student loans might also consolidate their federal student loans to qualify for Public Service Loan Forgiveness or to obtain an income-driven repayment plan.
There are eight ways a borrower can improve their chances of being approved to refinance their private student loans.
- Get a good credit score. A borrower’s credit score drops each year they are in school because their credit utilization goes up. It takes several years after graduation for a borrower’s credit score to improve, if the borrower manages their credit responsibly. In particular, the borrower must never be late on any payment on any debt, not just the student loans. A borrower with a track record of on-time payments is considered to be a “proven asset.”
- Check your credit history. You can obtain a free copy of your credit report from each of the major credit bureaus at annualcreditreport.com. Look for any delinquencies and other negative reports. Correct any errors and bring delinquent accounts current before applying to refinance a student loan.
- Have a low debt-service-to-income ratio. Eligibility for loans is often based on the percentage of income that must be devoted to repaying debt. Avoid charging too much on your credit cards, even if you pay off the balance in full each month, since the high water mark is that matters. The choice of repayment plans can affect the debt-service-to-income ratio.
- Pay down debt. The less debt you have, the lower your debt-service-to-income ratio. It helps to have little debt other than student loans. If you have other debt, try paying off this debt before applying to refinance your student loans.
- Earn a higher income. Borrowers who earn more are more likely to be approved for a refinance. A high income reduces the credit risk of the borrower, because they can afford to make the monthly loan payments. Report all of your income to the lender, including any side hustles or part-time jobs, not just your full-time employment.
- Maintain stable employment. Borrowers who are employed by the same employer for several years are more likely to be approved for a new loan. Unfortunately, recent college graduates have a tendency to switch jobs every year or so. A short duration of employment can increase the risk of default because of unemployment or underemployment.
- Apply with a cosigner. Even if the borrower can qualify for the refinance on their own, applying with a cosigner increases the chances of approval and may result in a lower interest rate. Credit underwriting decisions are based on the higher of the two credit scores.
- Shop around. Each lender has different credit underwriting criteria. Some lenders may be more likely to approve a refinance than others. For example, credit unions and community banks tend to be more flexible than larger lenders.