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What Should You Do If You Can't Refinance Your Student Loans?

Ben Luthi

The average student loan balance for recent college graduates is nearly $30,000, according to U.S. News data. If you have a high balance, you may consider refinancing your student loans to take advantage of a lower interest rate or monthly payment.

But student loan refinancing isn't an option for everyone, so it's important to know what else you can do to simplify your repayment plan, reduce your monthly payments and eliminate your debt faster.

What It Takes to Get Approved for Student Loan Refinancing

Refinancing involves using a private lender to replace your federal or private student loans with a new loan. Although the process can help you lower your monthly payment, interest rate or both, it's not necessarily easy to get approved for a loan at a rate that will help you save.

[Read: Best Student Loan Consolidation and Refinance Companies.]

You'll need to qualify for student loan refinancing, usually based on your credit score, debt-to-income ratio and income. Lenders are typically looking for a minimum credit score of about 650, and you may need to show at least two years of employment or meet minimum income levels for approval.

"If you're a recent grad, your FICO score is probably not the best reflection of your credit risk as a student loan borrower," says Travis Hornsby, student loan consultant and CEO of Student Loan Planner, a financial coaching company. Unless you've had the chance to build credit as a college student, it can take time to establish a good enough credit history.

That said, Hornsby points out that some lenders do have more modern underwriting criteria that also include factors like your savings balance and spending habits.

Many student loan refinancing companies allow potential borrowers to get prequalified and view rate offers on their websites without a hard credit check. But if you can't get approved or your offers don't allow you to save on monthly payments or interest, you may need to consider some alternatives.

"Whether or not you can refinance your loans, it's important to understand your debt and come up with a plan to tackle it head-on," says Kat Tretina, a certified student loan counselor who has written about student loans for consumer publications. "By exploring your options, you can make your debt more manageable."

I Can't Refinance My Student Loans. Now What?

Here are some things to consider if you can't refinance right now:

-- Improve your credit and cash flow.

-- Get a co-signer.

-- Consolidate your loans.

-- Get on an income-driven repayment plan.

-- Apply for a forgiveness program.

-- Request repayment assistance.

-- Consider deferment or forbearance.

-- Make aggressive payments.

Improve your credit and cash flow. If you're having a hard time getting approved because your credit score and income are too low, it may be worth it to work on building your credit and increasing your cash flow.

To improve your credit score, prioritize making all of your debt payments on time each month. If you have credit cards, keep your balances low, relative to your credit limit, to maintain a healthy credit utilization rate, which is about 30 percent. Avoid applying for multiple credit accounts in a short period, and use a free credit monitoring service to keep track of your progress.

To increase your cash flow, work on paying down other debt and increasing your income through a better job or a side business.

Building your credit history and increasing your cash flow can take time. But if you're going to be paying off your student loans for the next decade or more, taking a year or two to improve your financial situation to qualify for refinancing can still save you money.

Get a co-signer. If you don't qualify to refinance on your own, you may have a shot at getting approved if you have a co-signer with better credit and a higher income.

Just keep in mind that your co-signer would be responsible for making the payments if you can't. And while some private lenders offer a co-signer release program after you make a certain number of payments and meet credit requirements, you still may not get approved.

Consolidate your loans. If you have multiple federal student loans, you can consolidate them into one loan with the federal Department of Education. Consolidating can simplify your loan repayment plan, allow you to extend your repayment term and potentially give you access to repayment and forgiveness programs that you didn't have before.

That said, a direct consolidation loan won't save you money because your new interest rate will be the weighted average rate of your previous loans, rounded up to the nearest one-eighth of 1 percent. Also, extending your repayment term to get a lower monthly payment could result in higher interest costs over the life of the loan.

[Read: Best Private Student Loans.]

Get on an income-driven repayment plan. If you have federal loans and your primary concern is being able to afford your monthly payments, it may be worth it to consider an income-driven repayment plan.

There are four such plans available to federal loan borrowers, and all of them determine your monthly payment based on your income and family size. They also extend your repayment term to up to 25 years, after which any remaining balance is forgiven.

"If your payment doesn't go down after applying for those options, then you have to take a hard look at your budget," says Hornsby.

Income-driven repayment plans can be a great way to get immediate relief from a high monthly payment. But over time, you may end up paying more in interest, so it may be worth it only as a temporary measure.

But keep in mind that most private lenders don't offer income-driven repayment plans, so it may not be an option.

Apply for a forgiveness program. The federal government and many state governments offer student loan forgiveness to borrowers who meet certain requirements.

With Public Service Loan Forgiveness, for instance, you can get your remaining loan balances forgiven after making 120 qualifying payments and working for a government agency or eligible nonprofit organization.

You can also qualify for the Teacher Loan Forgiveness Program, which offers up to $17,500 in forgiveness to teachers who work in a low-income school or an education service agency for five years and who meet other requirements.

Check with your state for more information on state forgiveness programs.

Request repayment assistance. Although not technically loan forgiveness, repayment assistance programs can also help you pay down your student debt. Examples include:

-- National Health Service Corps Loan Repayment

-- Nurse Corps Loan Repayment Program

-- John R. Justice grant program

-- Army Loan Repayment Program

-- Navy Student Loan Repayment Program

Even some private employers offer student loan repayment assistance to their employees as a benefit.

Check whether you qualify for repayment assistance based on your career choice or through your employee benefits. Some programs require a certain number of years of service, but it can be worth it to save money while paying down your debt.

Consider deferment or forbearance. If your financial situation is dire, even an income-driven repayment plan might not be enough. "Talk to your lender if you can't afford your payment," says Tretina. "You may be eligible for a reduced payment for a short period of time while you get back on your feet."

These options are often called deferment or forbearance and may be available whether you have federal or private loans. Their terms typically vary by lender, though.

If you qualify for one or the other, there's usually a time limit, after which you'll need to resume payments. Also, interest typically continues to accrue during the relief period, unless you're on a deferment plan with subsidized federal loans.

Deferment and forbearance are typically worth considering if you're experiencing financial hardship and need a short-term reprieve. They can't, however, provide you with a long-term solution.

Make aggressive payments. If you can afford it, consider paying more than your set monthly payment. Extra payments typically go toward the loan's principal balance and can help you eliminate the debt more quickly.

As you determine how much extra to pay each month, though, try to consider your overall financial health. If you put every extra dollar toward your student loans each month and an emergency comes up, you can't get that money back from the lender to pay for it.

Hornsby recommends building a healthy emergency fund of at least $10,000 before tackling your student loan payments more aggressively. Depending on your specific situation, however, you may want more or less than that.

[Read: Getting Student Loans Without a Co-Signer.]

Refinancing Isn't Always the Best Course of Action

Student loan refinancing can help burdened borrowers reduce their monthly payment or interest rate. But even if you do qualify, it may not be the best option available. If you can qualify for a forgiveness or repayment program, for instance, you may save more money than you would refinancing.

"If you're in the military, are a teacher or health care professional, or work for a nonprofit or government agency, you could qualify for forgiveness or repayment assistance," Tretina says.

Carefully consider all your options before you settle on the right path for you.



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