Unemployment significantly complicates the task of repaying student loans. Unfortunately, it is while unemployed that many borrowers come to realize the heavy burden imposed by the interest accruing on their loans.
One of the best strategies to address the burden of high-interest student loans is through refinancing. Refinancing can help borrowers achieve lower interest rates. However, for the unemployed, this route presents unique challenges. Furthermore, jobless borrowers may want to avoid the refinance process altogether, depending upon which type of student loan they have.
This article will look at the refinance options available to borrowers and cover the different strategies that might come into play.
Federal Loans: Don’t Refinance If You Don’t Have a Job
For unemployed borrowers, federal student loans offer significant advantages over private loans, particularly when it comes to flexibility and repayment options.
Refinancing federal loans requires the borrower to convert their debt from federal to private. Although this move might make sense in certain circumstances, it is not a good idea for unemployed borrowers.
Federal student loans include some perks that are particularly advantageous during periods of unemployment. One of the best perks is the option to enroll in an income-driven repayment (IDR) plan.
IDR plans adjust a borrower’s monthly payments based upon their income. For borrowers with no income, this means that they will probably qualify for $0 payments until they can secure an income. Recently unemployed borrowers should enroll in an IDR plan as soon as possible to lower their monthly payments.
The flexibility and security provided by federal student loans often outweigh the potential benefits of a lower interest rate offered by refinancing. In fact, federal student loan perks, such as IDR plans, are so good that many borrowers choose not to refinance simply to safeguard against potential job loss or periods of lower earnings.
Thus, for unemployed borrowers, the protections and flexibility offered by federal student loans typically make them a superior choice compared to private loans. Refinancing to a private loan, even at a lower interest rate, could remove these critical safety nets and is not advisable without stable and secure employment.
Unemployed Borrowers Need a Cosigner to Refinance
Lenders will almost certainly reject a student loan refinancing application if the applicant lacks income. After all, it would be bad business for companies to loan money to individuals without the means to repay it. However, adding a cosigner to their application can enable some of those individuals to secure a refinance approval.
Having a cosigner means that another individual shares the legal responsibility for the debt. This site has repeatedly cautioned against cosigning student loans due to potential complications, such as:
- Impact on Credit: The debt can affect the cosigner’s ability to qualify for other loans, such as a mortgage.
- Difficulty Removing the Cosigner: While many lenders advertise cosigner release programs, the reality of actually removing a cosigner from the debt can prove quite challenging.
- Financial Risk to the Cosigner: If the borrower fails to make payments, the cosigner is legally obligated to pay. This can strain personal relationships and finances.
Despite these concerns, there is one scenario in which cosigning a loan could make sense. If a cosigner is already on the original student loans, it is usually in their best interest to cosign for a refinance loan. By helping the borrower refinance, the cosigner helps the borrower obtain presumably better terms, especially lower interest. This reduces the overall debt burden and decreases the chances that the cosigner will need to step in.
Borrowers who don’t have a cosigner on the existing loans, but are considering one for refinancing, should fully understand the implications. An unemployed borrower asking someone to cosign is essentially asking them to become legally responsible for a debt that the borrower has no current ability to pay. This is an objectively bad financial decision for the cosigner. Thus, borrowers should make certain that the cosigner understands the risks associated with cosigning the loan. The cosigner must be willing and able to manage the debt if the borrower cannot.
Shopping Around Becomes Especially Important
When it comes to student loan refinancing, shopping around is always a good idea. Each lender uses a unique secret formula for calculating the rates offered to borrowers. Thus, the only way to find the best rate possible is to check rates with several different lenders.
For unemployed borrowers, shopping around is pretty much mandatory. Some lenders automatically reject all refinance applications from borrowers without income. Other lenders will consider such applications if the applicant includes a cosigner.
However, adding a cosigner to the equation further complicates the lender formulas. Some lenders may charge their worst rates to the zero-income borrowers. In such scenarios, the cosigner exists only to change the rejection into an approval. On the other hand, some lenders might focus more on the creditworthiness and income of the cosigner, potentially offering significantly better rates if the cosigner’s financial standing is solid.
The process of shopping around involves comparing the terms offered by various lenders to see which one truly offers the most favorable conditions, taking into account both the borrower’s and the cosigner’s financial situations. This process can be time-consuming and requires thorough research. However, checking rates with several different lenders is the best strategy to secure the most advantageous refinancing terms. This is especially true for unemployed borrowers or those considering adding a cosigner to their applications.
Refinance Lenders to Consider
Securing refinance approval for an unemployed borrower is a major challenge.
The following lenders may offer the best odds of success:
- LendKey – According to our most recent student loan lender survey, LendKey had the highest percentage of applicants with a cosigner. This added emphasis on cosigners may be to the advantage of the borrowers who are between jobs. Additionally, LendKey works with many local banks and not-for-profit credit unions who may be more forgiving than many national lenders.
- Credible – Credible isn’t actually a lender. Instead, Credible will check rates with a handful of student loan companies to find the best offer. Going this route could save borrowers some time scanning the market.
While LendKey and Credible may offer the best odds of success, borrowers should also work their way through our full list of student loan refinance companies to find the best option.
Steps to Take When Employment is Secured
Once borrowers find a job, they should almost immediately start the refinance process again.
Those that were successful in refinancing without a job will find that they can get better rates. Additionally, they may be able to refinance without the help of a cosigner.
Those that failed may find that employment opens up many new doors for refinancing. They will also have much better odds at securing the lowest rates currently in the market.
