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Student Loan Refinancing for the Unemployed

Refinancing usually requires a steady income and decent credit score. Unemployed borrowers will need a cosigner if they want to refinance.

Written By: Michael P. Lux, Esq.

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Not having a job represents a significant obstacle to repaying student loans.

Sadly, it is during a period of unemployment that many borrowers realize how much student loan interest is costing them each month. One of the best ways to address a high-interest student loan is via refinancing.

Refinancing for the unemployed is possible. However, it will be challenging. Plus, depending upon the type of student loan, jobless borrowers may want to avoid the refinance process.

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 Refi If You Don’t Have a Job

For the unemployed, federal loans are far superior to private student loans. Borrowers that refinance their federal loans convert the debt from federal to private. While this move might make sense in certain circumstances, it is a bad idea for the unemployed.

One of the greatest perks of federal student loans is that borrowers can make payments based upon their income. For the jobless, it means that $0 payments can be made until they secure an income. Recently unemployed borrowers should get enrolled in an income-driven repayment plan as soon as possible so they can get their monthly payments lowered to $0.

In fact, the federal protections are so good that many borrowers with federal student loans choose not to refinance them at a lower interest rate because they would rather have income-driven repayment available in case they lose their job or become underemployed.

Regardless of how low the interest rate may be on a refinance loan, unemployed borrowers should never refinance a federal loan.

Jobless Borrowers Will Need a Cosigner to Refinance

If an applicant for student loan refinancing doesn’t have a job or any income, they will almost certainly be rejected. It would be bad business for lenders to give money to people unable to pay it back.

However, by adding a cosigner, some borrowers may be able to get approved for a refinance.

The problem with needing a cosigner is that somebody else will become legally responsible for the debt.

This site has cautioned against cosigning student loans for many different reasons. Cosigners may find that the cosigned student debt makes getting a mortgage more difficult. Many lenders advertise cosigner release programs, but getting a cosigner removed from a student loan can be difficult even in the best of circumstances. Worst of all, when things get bad on a cosigned loan, circumstances can get ugly for the cosigner.

Despite the many concerns with cosigning a student loan, there is one circumstance where it makes sense. If a cosigner is 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 save on interest, which lowers the likelihood that the cosigner will have to step in to make payments on the loan.

Borrowers who do not have a cosigner on the existing loans will need someone to step into some very risky debt. An unemployed borrower is essentially asking the cosigner to be legally responsible for a debt that the borrower has no ability to pay. This is objectively a bad financial decision, so borrowers should make certain that the cosigner understands the risks associated with cosigning the loan.

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 will reject all refinance applications from borrowers without income. Others will allow the addition of a cosigner to get approval.

However, the addition of a cosigner makes the lender formulas even more complicated. Some lenders may charge their worst rates to the zero income borrowers, and the cosigner exists only to change the rejection into an approval. Other lenders may see a cosigner with an excellent credit score and income and offer the borrower significantly better rates.

In short, the cosigner emphasis varies greatly from one lender to the next. As a result, borrowers will need to check with many lenders to find the company that actually offers the best rate.

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:

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 and that 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.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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