When you refinance student loans, lenders assess your financial situation to determine whether to approve the loan. Because major changes in your personal life, such as divorce or job loss, have a direct impact on your financial outlook, they can affect your ability to qualify.
If you’re contemplating whether to refinance student loans after a life change, here’s what you need to know.
Key Points
• Major life changes can affect student loan refinancing approval and loan terms.
• Refinancing after a positive life event like a salary increase might help borrowers qualify for lower interest rates or more favorable terms.
• Refinancing after a job loss may be difficult because of the lack of a steady income and may require a cosigner for approval.
• Refinancing after divorce is a way to remove an ex-spouse as a cosigner on student loans.
• Borrowers should consider the pros and cons of refinancing after a major life event to see if it makes sense with their current financial situation and goals.
Why Major Life Events Can Trigger the Need to Refinance
If you’ve experienced a major life event like divorce, refinancing your student loans may make sense. For example, if your ex-spouse is a cosigner on your student loans, refinancing makes the new loan yours alone. The same is true if you are a cosigner on your ex-spouse’s loan — with refinancing, you will no longer be responsible for the loan.
Financial changes that result from a major life event may be another reason to think about a student loan refinance. If your income went up due to a big promotion or salary increase, for instance, refinancing might offer better access to competitive student loan refinancing rates.
On the other hand, after a job loss, you may want to explore the option to refinance as a way to lower your monthly payments by choosing a longer loan term. However, be aware that a longer term means you’ll pay more in interest over the life of the loan. Additionally, if you have federal student loans, it’s important to note that refinancing the loans makes them ineligible for federal benefits such as income-driven repayment plans and federal deferment.
Assessing Your Financial Situation After a Major Change
Before you refinance student loans after a life change, think carefully about whether it’s the right choice for your current financial situation.
Consider whether student loan consolidation vs. refinancing is a better option, depending on the type of loan you have and your main objective. If you have federal loans and you want to streamline your payments, consolidation might work for you, though it generally won’t lower your monthly payments.
If you have private student loans, you can explore the repayment options offered by your current lender. They might have repayment relief programs that temporarily make your payments more manageable. If not, refinancing may be a way to get a lower monthly payment, if you qualify. A student loan refinancing calculator can help you see what refinancing might save you.
How to Refinance Student Loans After a Job Loss
Getting approved for a student loan refinance after a job loss can be challenging, but it is possible. There are a few steps you can take that may be helpful.
What Lenders Look for If You’re Unemployed or Low Income
During a student loan refinance, unemployed or low-income applicants may have difficulty qualifying because lenders generally want to know that the borrower has the financial ability to make their payments.
If you recently lost your job, a lender might look for other income sources, such as unemployment benefits or personal savings. Lenders will also examine your debts compared to your income, which is called your debt-to-income (DTI) ratio). Typically, they look for a DTI under 50%. If yours is higher than that, adding a cosigner with a steady income might help your chances for approval.
One of the most important factors a lender considers is your credit score. A borrower’s credit score helps determine whether they will be approved for a loan and the interest rate they get. If your credit score is low, adding a cosigner with strong credit might help your application.
Temporary Alternatives to Refinancing
Refinancing student loans isn’t the only way to help manage student loan payments after a major life change. There are some temporary options you can explore.
For example, if you have federal student loans and you are having trouble making your payments, deferment and forbearance are designed to allow you to apply to postpone payments. The main difference between the two is that interest accrues only on some federal student loans during deferment, but it accrues on nearly all of them in forbearance.
Deferment for up to 12 months at a time, for a maximum of 36 months, may be a better choice than forbearance if you have subsidized federal student loans and you’re dealing with substantial financial hardship.
If you have private student loans, some lenders have options that allow borrowers experiencing financial hardship to temporarily pause or reduce their payments. However, you may end up paying more toward your student loan debt overall under these relief programs since interest can accrue. Reach out to your current lender to find out more about any repayment programs they offer.
How to Refinance After Divorce or Legal Separation
Refinancing student loans after divorce can help ex-spouses untangle themselves from each other’s student debt. But a divorce can also change your refinancing application prospects.
Navigating Credit Score Changes and New Financial Obligations
For many borrowers, a divorce affects their financial resources and brings new financial obligations. Your household income might be lower and you may now be responsible for all of your housing costs, for example. Such changes in your money situation could indicate to a lender that refinancing might overextend your finances.
If you have poor credit you may also find it difficult to qualify for refinancing. You might need a cosigner on the loan to get approved.
Finally, it’s important to be aware that any joint accounts you have with your ex after the divorce can reflect on your credit as well. For example, late or missed payments on joint accounts will appear on your credit reports as well as your ex’s. This could impact your chances of refinancing, especially if your credit score drops. Talk to your creditors about separating the accounts you hold with your ex-spouse or converting them from joint to individual accounts.
Removing a Spouse as a Cosigner or Co-Borrower
If your ex-spouse agreed to cosign your student loan, or you cosigned theirs, a divorce doesn’t absolve the cosigner from being liable for the debt. Refinancing the loan, or getting a cosigner release can remove the other person from the loan agreement and relieve them from the loan obligation.
Refinancing After a Career or Income Change
Switching to a new career or experiencing a change in your income can also make a difference when you’re refinancing student loans after a divorce.
Requalifying with a Different Employer or Industry
If you’ve started a new job in your current field, or you’ve changed fields, it may be wise to wait three months to refinance. This is a standard probationary period for new employees — once you pass the three-month mark, it may demonstrate to lenders that your employment is reliable.
Showing Future Earning Potential to Lenders
If you’re refinancing your student loans after a pay increase or a career change that impacts your earnings, it’s important to make lenders aware of it. For example, moving from a lower-paying career to a higher-earning profession helps to show that you’ll likely have the financial resources to repay the loan.
Pros and Cons of Refinancing After Major Life Events
Like any financial decision, deciding to refinance student loans after a big change in your life like a divorce or job loss has advantages and disadvantages you’ll want to weigh.
Pros:
• Potentially qualify for lower interest rates through refinancing
• Remove an ex-spouse as a cosigner from student loans.
• Change loan terms to lower monthly student loan payments.
• Simplify repayment by combining multiple student loans into one loan with one payment.
Cons:
• Financial instability caused by a major life change can make it more difficult to qualify for refinancing.
• A cosigner may be required to secure the loan.
• Longer loan terms result in paying more interest over time.
• Refinancing federal student loans means losing federal benefits.
The Takeaway
Managing student loan debt while dealing with a major life event can be very stressful. Refinancing student loans might simplify or lower your monthly payments. However, your ability to qualify for a loan could be affected by the changes to your personal life, depending on your credit score, income, and employment.
Consider all the options available to you — including speaking to your current lender to find out about any temporary solutions available for repayment relief, student loan consolidation, and deferment — to help determine which course of action is right for you.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
Can I refinance my student loans if I’m unemployed?
Unemployed borrowers may have trouble getting approved for student loan refinancing. Without an income to make their monthly loan payments, lenders could consider them too risky. However, there are ways to potentially improve your chances of qualifying for a refinance while unemployed, such as adding a cosigner with strong credit and steady employment to the loan.
How does divorce affect student loan refinancing?
Divorce could affect student loan refinancing if you don’t have strong credit on your own. In that case, you may find it difficult to qualify. And even if you do qualify, you may end up with higher interest rates on the loan. Additionally, your household income may be lower after a divorce and you might have more financial obligations to cover, which could also affect your chances for approval. Adding a cosigner to your loan application might help.
Will a major career switch help or hurt my chances of refinancing?
Refinancing student loans after a major career change likely won’t hurt your ability to refinance as long as your income doesn’t drop significantly. In fact, if the career switch resulted in a paycheck boost, your chances of refinancing might improve.
Should I wait until my financial situation stabilizes to refinance?
Holding off on a student loan refinance until after your financial situation improves could help your chances of approval and potentially getting more favorable loan terms. Financial stability, including a steady income, demonstrates to lenders that you have the means to repay the loan.
Do I need to reapply for refinancing after a divorce or separation?
You should only need to refinance after a divorce or separation if one of you is a cosigner on the other’s student loans. In that case, refinancing after divorce will release the cosigner from the debt. Otherwise, the person who cosigned the loan remains responsible for repaying the debt if the primary borrower misses payments until the loan is repaid in full.
photo credit: iStock/wutwhanfoto SoFi Loan Products
SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SOSLR-Q225-001