Student loan refinancing can save money and simplify payments. But because of tough eligibility requirements, many borrowers don’t qualify.
When you refinance, a private lender pays off your existing loans and replaces them with a new one. The goal is to save money by qualifying for a lower interest rate, but lenders generally won’t work with applicants who are between jobs or have a low credit score.
If you don’t meet the qualifications for student loan refinancing, use these strategies to strengthen your application, or try repayment alternatives.
Strengthen your refinance application
Get your credit score in tip-top shape
Refinance lenders determine eligibility — and new rates — based on factors including an applicant’s credit score, income, debt load and educational background. Your credit score, in particular, shows how responsibly you’ve managed debt, so it should be as strong as possible before you apply.
Lenders NerdWallet has reviewed report that the average borrower has a credit score between around 680 and 780. If your score falls below that range, pay every bill on time. Automating payments for utility and student loan bills might help. And check your credit report to ensure lenders have the correct information. You can get a free copy of your report from each of the three major credit bureaus once per year at annualcreditreport.com.
Errors can make a difference: A 2013 Federal Trade Commission report found that 5% of Americans had an error on one of their credit reports that could have resulted in less favorable loan terms. A little more than 10% saw their score change once the error was addressed.
Boost your cash flow
Lenders also look closely at cash flow, or the money left over after you cover regular monthly expenses such as rent and car payments. From the lenders’ view, the more cash available, the more likely you are to repay a refinanced loan. To improve your cash flow, increase your income or reduce your expenses, says Phil DeGisi, chief marketing officer of refinance lender CommonBond.
“For many applicants, the latter option is often easier, but either one can make a difference in a refinancing application,” DeGisi says.
Consider paying off an outstanding credit card balance or adding to your income with a side gig, such as consulting, freelancing or taking advantage of the many “sharing economy” apps.
Use a co-signer
If you were denied based on your own financial profile, many lenders will let you bolster your next application with a co-signer who has stronger cash flow and a better credit score.
Before asking a parent, spouse or other trusted adult to co-sign a refinanced student loan, make the risks clear. The loan will appear on your co-signer’s credit report, and lenders will consider it part of his or her overall debt load. Any payment you miss reflects negatively on your co-signer’s score, and he or she will be required to pay if you can’t.
Go this route only if your co-signer fully recognizes the drawbacks, you’ll see refinance savings that make it worthwhile and it’s the only feasible way to qualify.
Other student loan repayment options
Sign up for income-driven repayment
Sometimes refinancing isn’t the best move. Say your student loan balance is much greater than your income and you likely won’t see a big income jump in the future. Even if a co-signer helps you refinance, your monthly payments could remain unaffordable.
Consider signing up for a federal income-driven repayment plan instead. You’ll receive a smaller monthly bill that’s tied to your income and repay the debt over 20 or 25 years. You won’t save on interest, but your balance will be forgiven at the end of the repayment term.
It’s crucial to note that refinancing federal loans turns them private, and you’ll lose the ability to sign up for income-driven repayment. If you’re considering refinancing and might want to take advantage of this benefit in the future, refinance private loans only.
Talk to your current private lender
Income-driven repayment is available only to federal loan borrowers. Some private lenders let borrowers make lower payments for a period of time, but these options aren’t as generous as the federal program.
Still, ask your lender about its short- and long-term loan modification options. In the past few years, Wells Fargo and Discover, for instance, have offered new loan repayment assistance programs.
“From my experience, they’ve become more flexible in trying to work with you,” says Terrence Banks, a Richmond, Virginia-based certified student loan counselor at Money Management International, a nonprofit credit counseling agency.
Protect your credit score by communicating with your lender and discussing ways to lower your payment, even when refinancing isn’t on the table.
This article was written by NerdWallet and was originally published by Forbes.