If you want more freedom and control over your career, self-employment can be a rewarding and fulfilling experience. According to the U.S. Bureau of Labor Statistics, approximately 10 percent of the nation’s workforce is now self-employed -- and it’s easy to see the appeal. You can set your own schedule, pursue what interests you and decide your own earning potential.
However, self-employment comes with unique challenges. Rather than having a regular salary, you have an income that can fluctuate wildly from month to month. That variable cash stream can make it difficult to keep up with your monthly bills, including your student loan payments.
Refinancing your student loans can be a smart way to take charge of your debt, but it’s sometimes harder to find a lender that works with self-employed borrowers. Here’s what entrepreneurs should know before pursuing this option.
What is refinancing?
Student loan refinancing can help you save money on your loan repayment, reduce your monthly payments, or pay off your debt faster.
When you refinance, you work with a private lender to take out a new loan for the amount of some or all of your current loans. The new loan will have different terms, including a new interest rate, repayment period and monthly payment.
For example, if you have a student loan at 6 percent interest, getting out of debt can be difficult since much of your monthly payment goes toward interest. But if you refinance to a new rate of 3 percent, for example, more of your monthly payment will go toward the principal -- saving you money in the long run.
Before you proceed with refinancing, it’s important to know that the process isn’t beneficial for everyone. If you have federal student loans and refinance them with a private lender, for instance, you’ll lose out on benefits like access to income-driven repayment plans. Make sure you understand the risks and benefits of refinancing before you apply for a new loan.
Which lenders will do it?
When you have a regular job and salary, refinancing your student loans is relatively straightforward. But some lenders might not consider you for a loan if your income differs from month to month; others don’t work with self-employed individuals at all.
However, lenders such as Earnest, CommonBond and Citizens Bank are more flexible. “Because we look holistically at each applicant's financial health, self-employed borrowers are absolutely eligible for student loan refinancing,” said Catherine New, senior editor with Earnest. “Our mission is to help financially responsible borrowers get out of debt quickly, so we look at data including income, savings, payment history and more, to understand the full picture.”
Will self-employment hurt my interest rates?
With other types of loans, such as mortgages, being self-employed can hurt your chances of getting approved because lenders view you as a higher risk. If a lender does approve you, you might have a higher interest rate than borrowers with traditional jobs.
Thankfully, your choice of career alone does not typically affect refinancing lenders’ interest rates. According to Randy Gearhart, vice president of consumer lending at Citizens Bank, the company looks at the borrower’s finances, including credit scores, instead.
“Citizens uses the applicant’s credit history to determine the interest rate and terms that are approved,” said Gearhart. “The type of employment or source of income is not used to determine the rate or term.”
How does self-employment hurt?
The average credit score is 700, according to FICO. However, self-employed individuals often have to take out more debt to get their businesses off the ground. The heavier debt load can hurt their credit scores, and those lower scores can result in a smaller chance of getting approved for a loan or a higher interest rate.
You can better your chances of receiving a loan and a competitive interest rate by boosting your credit score. Paying all your bills on time, reducing your debt and having different forms of credit can help improve your credit report.
Also remember that lenders look at your whole financial picture, including your credit score and income. If your business is successful and you can afford a healthy salary, you’ll be more likely to get a loan.
What do you need?
You can apply for a refinancing loan in minutes; self-employment doesn’t change that. However, you might need to gather more information ahead of time.
“We have the same easy online application and customer support regardless of employer,” said Phil DeGisi, chief marketing officer of CommonBond. “The only difference is that we’ll ask for slightly different documentation to confirm the applicant’s income.”
With a traditional job, you can submit an offer letter or recent paycheck as proof of income. But that doesn’t always work for self-employed borrowers.
“Normally, we require a pay stub to verify the income of borrowers during the application process,” said DeGisi. “Since self-employed borrowers usually don't have this information, we typically ask the borrower to verify their income another way, such as a copy of their tax returns.”
Each lender has its own guidelines about what documentation is acceptable, so it’s a good idea to contact the lender directly. Depending on the lender, you might be able to use tax returns, invoices or bank statements to prove your earnings.
What if you can’t refinance?
If your credit score or income is insufficient for a loan, you might be able to refinance with some extra effort or help. You can improve your chances of getting a loan by:
Having a co-signer: If you can’t get approved on your own, asking a relative or friend with good credit to co-sign a loan with you can help. Your co-signer is responsible for the loan if you fall behind, so make sure you can afford the payments before going this route.
Boosting your credit score: If you can wait a few months to refinance, take some steps to improve your credit score. Make all your payments on time, diversify your credit lines and pay down existing debt.
Taking on a side hustle: If you don’t make enough money to qualify for a refinancing loan, you can increase your income with a side hustle. Some lenders will consider your extra income as part of your loan application. With a higher income, you have a better chance of qualifying for a loan.
Related: Millennial Entrepreneurs: 5 Tips to Ensure Student Debt Doesn't Hold You Back
Plenty of self-employed individuals refinance their student debt, so don’t let your career delay you. Take the time to contact multiple lenders, confirm they work with self-employed borrowers and get your records in order before applying. You’ll soon have a better loan for your financial situation, giving you more room to focus on your business instead of your debt.