What to Do If You’re Denied for Student Loan Refinancing

Getting denied for student loan refinancing can be a frustrating experience. If you haven’t missed any payments on your current loans, it can be especially confusing that a lender wouldn’t happily take your business.

There are a variety of factors that lenders consider in their decision to approve or deny a student loan refinance application. Most refinancing companies have credit score and debt-to-income (DTI) ratio requirements. Your salary and whether you’ve earned your degree can also impact your eligibility.

If you’ve been struggling in vain to refinance your student loans, there are steps that you can take to improve your likelihood of approval. Below, we look at what you can do today, over a few months, or over a couple of years.

What to do today if you’ve been denied

If you’ve just been denied student loan refinancing, you’ll want to put yourself in a better position before trying again. Here are a few actions that can be taken today.

Check your credit reports and scores

For many borrowers, low credit might be the primary reason for a rejected student loan refinance. Simply put, if your credit score doesn’t meet the lender’s minimum criteria, don’t expect a loan approval, even if you have a great job and steady income.

Scoring models use the information found in your credit reports to calculate your credit scores. So if your credit score is what’s holding you back from being able to refinance your student loans, you’ll want to check your credit reports to identify the issues.

In some cases, the problems might be obvious. For example, if you have a late payment, charge off, or other negative items on your credit reports, it’s likely to pull down your score.

But if your payment history is solid, other factors might drag down your score. Other credit score factors include your credit utilization rate, length of credit history, number of recent hard credit inquiries and credit mix.

Keep in mind that there are three main credit bureaus (Experian, Equifax and TransUnion) and you have a credit score with each. You can check all three of your credit reports at AnnualCreditReport.com.

Typically, you’re limited to one free check per 12 months, but the bureaus are offering weekly free credit reports until April 2021 due to COVID-19.

Annualcreditreport.com only provides credit reports, not scores. If your bank or credit card issuer doesn’t provide your credit score, you can use a free credit score service, like Credit Karma or Experian.

Dispute credit report errors

Most negative items stay on a credit report for seven years. If the negative information is accurate, there’s little you can do to get it removed until it falls off on its own. However, if the credit bureau or issuer made a mistake, you have the right to dispute the error to have it removed from your credit report.

You can dispute the negative credit report item with the bureaus, the company that reported the negative information, or both. You can visit Consumer.FTC.gov to see sample credit dispute letters.

Improve your credit utilization rate

Your credit utilization rate is simply how much of your available revolving credit that you’re currently using. For example, if your credit cards have a combined credit limit of $10,000 and you spend $2,000 on them, your credit utilization is 20% ($2,000/$10,000 = 0.20).

With both the FICO and VantageScore, credit utilization is one of the most influential scoring factors. In general, the lower you can drop your credit utilization percentage the better. But how low is enough to improve your score? The Consumer Financial Protection Bureau (CFPB) recommends keeping your credit utilization rate below 30%.

Ask for a loan reconsideration

Loan applications are often processed automatically by computers. But the lender’s underwriting algorithm might not have considered all the specifics of your financial situation.

A computer algorithm doesn’t know that you have a significant amount of cash assets, you were just hired at a Fortune 500 company or the negative credit item on your credit report was from a loan you cosigned and didn’t realize wasn’t being paid.

If you feel like your refinancing application would stand a strong chance of being approved after the details of your finances and credit history were explained to a human being, consider asking for a loan reconsideration.

You can request a loan reconsideration over the phone from the lender’s underwriting team. Or you can send a letter that explains why you think your application deserves a second look.

Add a cosigner

Although it could help you qualify for student loan refinancing, adding a cosigner to your application isn’t a decision to be taken lightly.

If a borrower with a cosigned loan falls behind or defaults on their debt, the cosigner’s credit will be damaged. Before adding a cosigner to your refinancing application, make sure that you both fully understand the risks involved.

If your current loans are already cosigned, however, refinancing together could make a lot of sense. Your cosigner is already on the hook for the loan anyway. So helping you refinance at a lower rate or better terms would simply reduce the chances of you falling behind on your payments and hurting both of your credit scores.

Not all student loan refinancing lenders allow cosigners, but many do. Learn more about how to refinance with a cosigner.

What to do in a few months

You might not be able to complete the next two steps on our list today, this week, or even this month. But over a period of six months or less, paying down debt and/or adding income could make a big difference in getting approved for refinancing. Let’s take a closer look at both strategies.

Pay down debt

A high debt-to-income (DTI) ratio is another common problem that can lead to a borrower being denied for student loans with a refinance lender. To calculate your DTI, add up all of your monthly debt payments and divide it by your monthly income.

For example, let’s say that you have a monthly mortgage payment of $1,200, a car payment of $350, a student loan payment of $250, and a credit card payment of $200 . Combined, your monthly debt obligations are $2,000. If your monthly income is $4,000, you DTI would be 50% ($2,000/$4,000 = .50).

A 50% DTI is right at the maximum that student loan refinancing companies will allow. But by paying down just a couple of your debts, you could significantly improve your DTI. For example, if you paid off your car and credit cards, that would bring your monthly debt payments down to $1,550 and your DTI down to 39%.

Another DTI calculation to consider is your cumulative student debt to annual income.

Travis Hornsby, founder of Student Loan Planner®, recommends getting this ratio to 2:1 before applying for refinancing. So if you earn $100,000 per year, you’d want your combined loan balance to be below $200,000. If you owe more than that, you may want to focus on paying your loans down to the 2:1 benchmark before applying.

Find additional income sources

Paying down debt is one way to improve your DTI. But adding income will also make a positive impact. Let’s say you make $5,000 per month and have $2,000 of monthly debt obligations. In this scenario, your monthly DTI is 40%.

But by earning just $1,000 of extra income per month through a second job or side hustle, your DTI would decrease to 33%. And if you somehow find a way to increase your monthly income by $3,000, your DTI would drop to 25%.

Finding additional income sources could also help you get your cumulative debt below two times your income. Let’s say you make $75,000 per year and owe $160,000 in student debt.

At your current income, your student debt would be $10,000 above the 2:1 limit of $150,000 ($75,000 x 2 = $150,000). But by increasing your income by just $6,000 per year ($500/month) to $81,000, you’d suddenly owe slightly less than two times your annual income ($81,000 x 2 = $162,000).

Related: Student Loan Forgiveness Jobs, Side Hustles and Eligibility: What You Should Know

What you can do over a couple of years

When you’re refinancing with bad credit or have no credit history at all, a few months might not be long enough to put yourself in a good position for student loan refinancing. But here are a few longer-term strategies to follow.

Build a positive credit history or rebuild damaged credit

If you’re looking to build credit from scratch or rebuild your credit, there are several credit-builder tools that can help. One option is applying for a secured credit card. Since these cards require a security deposit as collateral, they’re easier to qualify for than traditional (unsecured) credit cards.

Other popular strategies for rebuilding credit include taking out credit-builder loans or secured loans and being added as an authorized user to another person’s credit account. Typically this strategy relies on a trusted friend or family member’s credit card.

Regardless of the credit-building tools that you use, be sure to make your payments on time each month and practice good credit habits.

Reduce or eliminate the impact of negative credit report items

Most negative items (with the exception of bankruptcy) fall off of credit reports in seven years. That might sound like a long time, but if the negative item was added several years ago, you might be nearing its removal date.

If you’re less than two years away from a major, negative item dropping from your credit report, consider waiting until then before reapplying for student loan refinancing. But don’t fret if you’re still several years away from a negative credit report item being removed. The impact that negative items have on credit scores diminishes over time.

So, for instance, a charge-off on your credit report that was added three years ago may hinder you from hitting your lender’s credit score minimum. But two years from now, a five-year-old charge-off may not prevent you from reaching that score (provided that no negative items have been added since).

When to seek professional help

Following the steps above should improve your creditworthiness over time. But if you’ve followed all the steps above, and are still getting denied for student loan refinancing, you might want to seek the advice of a student loan attorney.

A student loan lawyer can inform you of your legal rights as a borrower and help you resolve legal disputes. In particular, if you have private loans that were fraudulent or not represented accurately, a student loan attorney can defend your rights in court. Learn more about when it could make sense to hire a student loan lawyer.