Why You May Not Qualify for the Best Refinance Rates

Last Updated: July 10, 2021 by Melanie Hanson

There are many reasons you may not qualify for a low-interest rate when you refinance your student loans, and there are steps you can take to improve the chances you’ll qualify for the best rates and terms.

How Refinance Lenders Determine Rates
Credit During the qualification process, the first item refinance lenders review is your credit history, including your credit score.
Income If your credit history demonstrates financial responsibility, the lender may still require proof of suitable income.
Education You will likely submit your degree status in order to prequalify; a more advanced degree suggests greater earning potential.

Reasons for Poor Refinance Rates

When refinance lenders determine a loan’s interest rate and its annual percentage rate (APR), they typically take multiple factors into account. Some of these are beyond your control, such as economic and legislative factors (e.g., fiscal indices, federally mandated limits, etc.).

What ultimately determines your individual APR, however, is your status as a borrower. Lenders use different methods to score borrower desirability. A lender’s requirements tell you what characteristics they value most in potential borrowers.

If you do not meet these requirements or otherwise do not exhibit the desired characteristics, it may be difficult or impossible for you to refinance at a manageable rate. The average rate for private and federal borrowers is 5.8%; federal loans have an average interest rate of 4.12%.

Credit Requirements

Because a refinance loan is essentially a new line of credit, the potential borrower’s credit history is generally a significant factor.

Most lenders have minimum credit requirements. For example, borrowers must have both an established credit history and a credit score above a certain threshold. Meeting these requirements demonstrates the borrower’s ability to manage lines of credit responsibly.

Pie Chart: FICO Credit Score Factors

Minimum Credit Score

Your credit score refers to a rating system developed by the Fair Isaac Corporation. Most refinance lenders use the FICO® Score 8 model, which measures your credit on a scale of 300 to 850.

Lenders generally have a minimum credit score between 650 and 700. Borrowers with a score exceeding 800 will qualify for the most agreeable interest rates. Scores in the 700s are considered “good” by most lenders, though you may be able to improve your rate with a co-signer.

It is unlikely a lender will agree to refinance your education loans if your credit score is below 650 unless you are able to arrange for a co-signer. Any score below 550 is almost universally considered “bad”; with some lenders, that alone may disqualify you for refinancing.

Federal Credit Score Levels
Level Score Monthly Student Loan Originations
Deep Subprime Below 580 $1.941 billion
Subprime 580 – 619 $1.155 billion
Near-Prime 620 – 659 $1.607 billion
Prime 660 – 719 $2.616 billion
Super-Prime 720 and above $3.109 billion

Credit History

If you’re refinancing, you already have a credit history in the form of student loans. Irregular payments, large balances, and accounts in delinquency may all have a negative impact on your credit history and, by extension, your refinance loan interest rate. Some lenders do not allow any history of default or bankruptcy.

Any bankruptcies, foreclosures, or collections remain part of your credit history for 7 years – and as these entries get older, they affect your credit score less and less. Unpaid tax liens may remain on your record indefinitely, however.

Few or no additional, established lines of credit leave your credit history sparse. This may also hurt your chances of qualifying for a low interest rate. 43% of college students say they start building credit during their first year of college; 23% have a credit card prior to their freshman year.

Other Types of Credit
Credit Cards Open-end loans finance day-to-day purchases. Most major credit cards are standard unsecured cards. Store or small business credit cards are limited to purchases made at a single business. Secured cards require a security deposit, and charge cards require full balance payments.
Auto Loans Closed-end loans finance automobile purchases. Secured auto loans use the vehicle as collateral. Unsecured loans prevent repossession in the event of default, but interest rates are generally higher. Title Loans allow a lender to place a lien on a vehicle the borrower already owns.
Home Loans & Mortgages Closed-end loans purchase or refinance residential properties. Mortgages may or may not be insured by the federal government. Most borrowers use conventional mortgages, which are not federally insured.

Income Requirements

Lenders generally require proof of income. This may be in the form of a pay stub, W2, tax return, or other verifiable proof of employment. Beyond that, some lenders require a minimum annual income or a minimum debt-to-income ratio.

In other words, lenders want to make sure you make enough money to pay off the loan without going into delinquency or default.

Steady Income

Freelancing or “gig” work is common in the modern economy. Not all lenders consider this a satisfactory source of reliable income, however. Some lenders may even prefer that you have a steady job with a slightly smaller income. A recent or sudden unexpected loss of income may also disqualify you from the best refinance rates.

The median income for 25- to 29-year-olds bachelor’s degree holders was $50,600 (high-end $78,700, low-end $40,300) in 2018 or $4,216.67 per month (high-end $6,558.33, low-end $3,358.33).

Debt-to-Income Ratios
DTI Monthly Income Monthly Payment
36% $4,216.67 $1,518.00
43% $4,216.67 $1,813.17
15% $4,216.67 $632.50
36% $3,358.33 $1,209.00
36% $6,558.33 $2,361.00

Debt-to-Income Ratio

Your debt-to-income ratio or DTI refers to your gross monthly income as compared to your monthly payment. According to federal guidelines recommend a maximum debt-to-income ratio of 36% (just over 1:3) for homeowners.[1]

Indebted borrowers who live in rental housing should limit their DTI to between 15% and 20%. This ratio does not include income that goes toward rent, so their actual DTI may be closer to 10% or 5%. The smaller the percentage, the higher your income must be in comparison to your payments.

Some lenders will allow a DTI as high as 43%. In such cases, you will likely have to have a qualifying co-signer, own a home, and/or have a reasonable expectation that your income will increase in the near future.

Bar Graph: Employment Rates by Education Level among civilian, noninstitutionalized population

Education Requirements

Among the refinance lenders we’ve researched, 50% require at least an associate’s degree in order to qualify for refinancing. Those that allow non-graduate refinancing charge the highest interest rates to these borrowers.

Borrowers with more advanced degrees are more likely to be authorized to access larger lines of credit at lower interest rates.

Without a degree of any kind, it is unlikely you will find a lender willing to refinance your education loans at a desirable rate. Under some circumstances, it may be worthwhile to return to school in order to earn a degree.

Sources

  1. Consumer Financial Protection Bureau (CFPB), Debt-to-income Calculator
  2. CFPB, Consumer Credit Trends
  3. Federal Trade Commission, Consumer Information: Understanding Your Credit
  4. MyFICO, How Scores Are Calculated
  5. The University of Kansas Office of the Vice Provost for Student Affairs, Student Money Management Services
  6. U.S. Department of Education National Center for Education Statistics, The Condition of Education