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Updated on Friday, December 7, 2018
After being rejected for student loan refinancing, you might think it’s out of your reach.
The good news is that once you diagnose why you fell short, you can improve your application and try again.
Consider these three common reasons to get rejected for student loan refinancing, plus how you can work toward acceptance.
1. Your credit report revealed a red flag
When you attempted to prequalify and then formally apply for student loan refinancing, your potential lender likely performed both “soft” and “hard” credit checks. Their underwriting team was looking for red flags, such as a subpar credit score, a history of missed debt payments or any major financial events, such as a bankruptcy.
Lenders peel back these layers to verify your reliability when it comes to repaying debt. It’s possible you were rejected out of hand because you fell short of one these basic requirements common to many lenders.
For example, many top-rated student loan refinancing companies require you to sport a credit score in the high 600s. If you applied with a lower score, you disqualified yourself immediately.
Other times, a historical note on your credit report could have killed your refinancing application. For instance, some lenders require that you be at least five years removed from bankruptcy before applying to refinance.
What to do about it
The quick fix here would be to seek out lenders who have more lenient requirements. Perhaps you could qualify with Earnest (minimum credit score of 650) if you fall short at a competing lender like EDvestinU (700).
Be sure to avoid slick lenders, however, that offer quick acceptance in exchange for gotcha-style fees, interest rates or repayment terms.
Now, say your score isn’t even in the 600s. You could accelerate your path to acceptance by bringing on a cosigner. A creditworthy parent, for example, could lift your application above the threshold. Just keep in mind that some lenders would still require you, as the primary borrower, to hit a credit score minimum, albeit a lower one.
The slower but more rewarding path to a stronger refinancing application is to work on improving your credit score.
Before all else, consider the factors affecting your credit. Your score could climb, for example, if you make on-time debt payments and lower your overall debt. Taking out a credit builder loan and repaying it in a timely fashion is one way to speed up the process.
Track your progress using a free service like My LendingTree. (Note: LendingTree is the parent company of MagnifyMoney.) You can also review your full credit report for free annually via AnnualCreditReport.com.
2. Your debt-to-income ratio is out of whack
Lenders understand that you’re going to have debt. Otherwise, you wouldn’t be knocking on their door. However, their underwriting teams want to confirm that you have the paycheck to keep up with your loan repayment, plus your other potential outstanding debt.
They consider three related factors during the underwriting process:
- Income: What’s your annual gross income?
- Employment history: Where does your income come from, and have you held jobs for consistent periods?
- Debt-to-income ratio (DTI): Does your debt dwarf your income, or do you have the salary to repay your creditors?
Your refinancing application could have stalled for any of these reasons. Perhaps your credit card debt and entry-level salary are harming your DTI, for example.
Lenders typically seek applicants with DTIs below 40%. You can calculate your DTI using the following equation:
Monthly debt payments / Monthly pretax income = DTI
It’s also possible that you don’t earn enough income to qualify. Top-rated lenders like Splash Financial ($42,000), Education Loan Finance ($35,000) and LendKey ($24,000) each set different benchmarks for prospective borrowers.
What to do about it
Shopping around for a good lender is the easiest solution. There are more and more lenders that don’t have income and employment requirements, so you could improve your application by simply applying elsewhere.
Earnest is an example of a lender that prides itself on a more flexible approach to underwriting. The company rewards applicants who are good savers, and who have strong educational backgrounds and earning potential.
Another solution to this problem would be piggybacking on a higher-earning cosigner who won’t mind footing the bill for your loan if you’re unable to repay it yourself.
But the most challenging — and probably most beneficial — solution is increasing your income, decreasing your debt or ideally, both. That’ll help improve your DTI.
If you can’t lower your debt by trimming your household budget, you might pause your refinancing applications to focus on increasing your income. You could take on a side hustle, negotiate a raise at work or use the next major holiday to ask family and friends for their financial support — whatever works best for you.
3. You’ve missed payments on your loans
The largest determining factor of your credit score is payment history. It comprises 35% of the commonly used FICO score. Plus, a missed — or delinquent — payment could stay on your credit report for as long as seven years.
Aside from the effect delinquency might have on your credit, it could stall your application. After all, lenders want to avoid applicants who don’t have a strong history of repaying their debt promptly.
If your delinquency has turned into a default, refinancing might be out of the question. Most top-rated lenders, including Earnest, require that all your loans be in good standing at the time of your application.
What to do about it
You might have seen refinancing as the way to get up to speed on your loan repayment. Unfortunately, you have some dirty work to do first.
For federal loans in default, you can take one of two paths:
- Loan rehabilitation: Phone your servicer and agree to make nine on-time payments over the next 10 months to get your loan up to date. In exchange, your loan will no longer be considered in default.
- Loan consolidation: Using a direct consolidation loan, group your loans into one. You won’t be able to lower your interest rate, but you will be able to reduce your monthly payments via an income-driven repayment plan — and most importantly, shed the “default” status.
For delinquent or defaulted private loans, the road ahead could be more difficult. Open the lines of communication with your lender to review your options.
You might be surprised at how understanding some lenders can be. You might get an offer, say, for a modified repayment plan or a temporary forbearance to allow you to catch your breath before continuing repayment.
Once your loan repayments are back on schedule, you’ll be much less like to get rejected for student loan refinancing.
Don’t give up on refinancing after a rejection
There’s only one way to lower your student loan interest rates while starting fresh with a lender of your choice. Refinancing gives you that ability, and that’s why it’s not always easy to qualify for it.
When jumping through hoops to improve your credit, DTI or loan statuses, don’t lose sight of your goal to overcome getting rejected for student loan refinancing. No matter how your application fell short initially, you can turn rejection into approval by taking some serious steps in the right direction.