Facing rejection when you apply for private student loan refinancing is a devastating blow. You are trying to take action to pay off your loans responsibly, and instead of taking a step forward, you get denied.
If there is any good news in this situation, it is in the fact that it is temporary. A student loan refinance denial today does not mean you will never be approved. It just means that today was not your day. If you can channel the disappointment you feel right now into some motivation, you can significantly increase your odds of approval.
Reminder: Lenders are not running a charity
Remember all those smiling faces in the ads and on the lender websites?
Don’t be fooled.
These guys are not in business to see how many smiles they can put on faces. They are in business to make money. That means that getting approval isn’t about showing that you can pay off your debt; it is about showing that you should easily be able to pay off your debt.
Go after the numbers that matter
Most lenders will look to three critical numbers on a borrower’s application. The first two are obvious: your credit score and income. This final key number is your monthly debt compared to your income, as reported on your credit score.
Most people have heard of a debt-to-income ratio. It sounds simple, how much you owe compared to how much you make, but it isn’t that easy. The total amount of debt that you have is of minor significance to your application. The critical number is how much you have to pay each month on your debt.
For example, if you have a student loan with a $6,000 balance and a monthly payment of $100, the critical number will be the $100 per month that you have to pay.
Lenders want to see that you can comfortably pay your bills each month. If the minimum payment on all of your debts is low, it will appear much easier to pay off your debt.
The specific lender you choose to work with will also matter. In our most recent lender survey, we found that debt-to-income ratios needed to be eligible to refinance varied dramatically from one lender to the next.
The Easy Fix: Changing Repayment Plans
If the debt-to-income ratio (DTI) is the main problem, fixing it will typically require earning more money or paying off some debt. These options can be quite challenging.
However, there is one way that borrowers can quickly fix their DTI without having to do much work.
Making smaller monthly payments will mean that a borrower spends more on interest over the life of the loan. However, borrowers can always continue to make payments as initially planned.
In many cases, borrowers can change repayment plans without any negative consequences. For example, a borrower in the standard 10-year federal repayment plan could switch to an income-driven repayment plan and dramatically reduce their monthly payment. The federal repayment simulator is a great tool for estimating monthly payments on the various repayment plans.
Some private lenders will also allow borrowers to change repayment plans. Selecting the loan with the lowest monthly payment will help the borrowers DTI the most.
This tweak could turn a student loan refinance rejection into an approval. However, keep in mind that it can take a month or two before payment plan changes show up on a credit report.
Dealing with Credit Card Debt
One of the quickest ways to improve your debt-to-income ratio is to pay down credit card debt.
With most forms of debt, the monthly payment on your credit report stays the same. For example, if I pay extra on my car payment this month, my car payment next month doesn’t change.
Credit card debt is different. If I pay off a chunk of my credit card balance, the minimum payment for the following month is lower.
As a result, one of the quickest and most efficient ways to reduce your debt-to-income ratio is to pay down or eliminate credit card debt.
Important Note About Credit Cards: If you pay off your credit card balance completely, don’t make the mistake of closing your account. Age of credit is an important aspect of credit scores. Closing an account will lower that number and hurt your score.
Those with credit cards that charge a yearly fee may want to close their account. However, most credit card companies have zero fee options and can switch the card to stay open without any more yearly fees.
Casting a Wide Net: Turn Student Loan Refinance Denial Into a Yes
Many borrowers mistakenly assume that one rejection means other lenders will also reject them.
This attitude can be a huge mistake.
Each lender uses a different formula for deciding who gets approved and who gets rejected. These formulas are closely guarded secrets.
Some lenders may emphasize credit score. Others may care more about income or how long you have had your job. Some lenders may even factor in your major and where you went to school.
Thus, it is vital to cast a wide. This approach will help find an approval and help find the lowest possible refinance rate.
There are a few lenders that borrowers struggling to gain approval should consider: LendKey works with a massive network of local credit unions and has higher approval rates. SoFi used to be very picky, but they have become far more forgiving as they have grown. Splash Financial recently slashed rates and has been approving at a higher rate than usual.
Finally, it is important to note that checking rates with multiple lenders will not hurt your credit report. As long as borrowers check rates within a 30-day window, the credit bureaus will treat it as a single credit inquiry.
A Powerful but Expensive Strategy: Targeted Elimination of Certain Debt
Complete elimination of certain debts is a very powerful way to improve your debt-to-income ratio and your odds of approval.
When it comes to eliminating debt to improve your consolidation application, you may not want to go after the high interest or low balance debt first.
Suppose you have the following three debts on your credit report:
- Student loan A: Interest rate 4%, balance $6,000, monthly payment $100.
- Student loan B: Interest rate 11%, balance $20,000, monthly payment $350.
- Car loan: Interest rate 6%, balance $7,000, monthly payment $300.
The experts will tell you to go after student loan B, because it has the highest interest rate, or student loan A, because it has the smallest balance. However, if you want to improve your refinance application, paying off the car loan could get you the most bang for your buck.
If you pay off student loan A, it will cost you six grand, but your monthly bills only improve by $100. Alternatively, if you attack student loan B, by the time it is paid off, refinancing will no longer be of any real value as you are left with low-interest student debt. Instead, pay off the car loan. It only costs slightly more money than student loan A, but when you have it paid off, your monthly debt drops by $300. This number falling off your credit report is a dramatic change, and it could be the difference between rejection and approval.
When should I use the payment elimination strategy?
It all comes down to the math. If paying off a lower interest loan quickly can help you reduce the interest on the rest of your loans, it might be worth pursuing.
The only way to know if this approach is best for you is to make a spreadsheet and compare the different plans. You should also keep in mind that paying off one debt does not make getting an approval a sure thing. Talk with the lenders you are interested in working with to see how close you are to an approval. If an improvement in your debt-to-income ratio is what you need, this plan could help.
Side Note: An Added Benefit of Loan Elimination
Paying off entire loans is also a pretty powerful tool for mortgage applications.
If you can eliminate a high monthly payment debt before applying for a mortgage, you can qualify for a higher house payment. It could be the difference between affording the house you want and getting rejected.
Look Around Before Making Dramatic Changes
Before you make any dramatic plans to adjust your credit application, keep in mind that there are many different lenders offering refi services.
A rejection with one lender does not mean you can’t borrow from anyone. It could just mean that you haven’t found the right lender for your situation. Different lenders have different specialties. For example, while SoFi caters towards high earners with significant debts, a company like Earnest looks at far more financial information, such as retirement savings, before making a decision.
Ultimately, the more you understand about credit approval decisions, the smarter you can be about turning your student loan refinance denial into an approval.
Steps to Turn a Refinance Rejection into an Approval
- Find the lowest possible monthly payment on federal student loans. Use the Department of Education’s Loan Simulator to explore options.
- Pay down credit card debt. Even paying just a little extra can make a difference.
- Look into options for eliminating entire loans. Attacking the right loan can make a credit profile look much better.
- Be sure to shop around. There are about 20 different lenders providing refinance services, and they all have unique formulas for making approval decisions.