If you work as a business owner, contractor, freelancer, or in any other role where you are your own boss, you’re considered self-employed. In the world of private student loan refinancing, this unique employment status can raise questions about your ability to repay a refinance student loan.
You can refinance student loans if you’re self-employed, although approval isn’t guaranteed. This article will guide you through what you need to know if you’re considering refinancing student loans when you’re self-employed.
In this guide:
- Refinancing requirements for self-employed borrowers
- How to verify self-employed income to refinance student loans
- Lenders that will refinance student loans to self-employed borrowers
- Should you refinance your student loans?
- Alternatives to refinancing student loans
Refinancing requirements for self-employed borrowers
You might consider refinancing your student loan for many reasons, including securing a lower interest rate, changing your repayment period, or reducing monthly payments.
To qualify for private student loan refinancing, you’ll need to meet certain eligibility requirements. Student loan refinancing lenders analyze various factors to determine whether you qualify for refinancing, with one of the most important being related to your creditworthiness and ability to pay:
- Minimum credit score or credit history: A common requirement is a minimum credit score in the mid-600s. On top of that, lenders need to see a solid credit history of on-time payments and no bankruptcies.
- Minimum income: Some lenders list a minimum annual income threshold. ELFI, for example, requires you to make at least $35,000 per year. Others don’t list a specific income amount but require proof of stable income.
The income requirement is where self-employed borrowers often face challenges. Most lenders ask borrowers for pay stubs to verify income. Being self-employed means you may not have a standard pay stub from an employer, and so demonstrating consistent income can require additional effort.
One of the simplest ways around this is to check if you have federal or private student loans. If you have federal student loans, you might consider student loan consolidation, which does not require you meet income or credit requirements, or to verify your income.
Instead, you merge your federal student loans into one consolidated federal loan, with an interest rate that is the weighted average of all of the refinanced loans. You likely will not achieve significant savings on interest with this method, but it has a similar effect as refinancing in merging multiple loans into one for one monthly payment.
With federal student loan consolidation, you also salvage federal benefits that can be helpful if your income is unreliable, including loan forgiveness. Refinancing federal student loans into private ones means you lose access to these important benefits.
Do you have private or federal student loans? Visit studentaid.gov. If you see your loan information, you have federal student loans. If you don’t, your loans are private. You can also call the federal student aid helpline at 1-800-4-FED-AID to find out if your loan is serviced by one of the nine federal student loan servicers. Or check your billing statement to see whether it lists a private lender.
How to verify self-employed income to refinance student loans
If you do decide to pursue student loan refinancing, you’ll likely need to show the previous two years’ worth of documented income to verify you have reliable cash flow. To do this, you should be prepared with:
- Personal income tax returns: The two most recent years’ personal income tax returns (Form 1040 for self-employed tax filers).
- Business tax returns: If you own at least 25% of a business, the two most recent years’ business tax returns (appropriate forms vary depending on the business type); if you own less than 25%, the two most recent years’ K-1 schedules of the business tax returns.
- Profit & loss (P&L) statement: Year-to-date P&L statement summarizing recent financial activities.
- Alternative documentation: Some lenders, such as Laurel Road, accept other documentation, including signed contracts for guaranteed future employment and income.
The most important factor is that lenders want to see a consistent, stable, reliable means of making the payments on your refinanced student loan. Generally, if your income varies by more than 20% year over year, be prepared to explain that to the lender you are applying with.
If you can provide the required income verification and meet credit and other eligibility requirements, you should be well on your way to refinancing your student loans, even if you’re self-employed.
Ask the expert: How can self-employed borrowers best demonstrate financial stability to potential lenders when looking to refinance?
Crystal Rau, CFP®
As a business owner, the most important thing a person can do is set up systems in their business in the beginning so they can establish or prove patterns and growth in their business. This includes keeping their business income and expenses separate from their personal accounts, keeping their books update on a consistent basis so nothing falls through the cracks, and filing their taxes on time. Having a clear view of your business finances at any point will give you the confidence to walk through your financials with a lender and prove you’re responsible and diligent in managing your business and personal finances. This will give the lender confidence before giving you a large loan.
Lenders that will refinance student loans to self-employed borrowers
Most lenders do not explicitly state whether they will lend to self-employed individuals or allow them to refinance student loans. However, some lenders might have stricter requirements for self-employed borrowers due to their income fluctuations and the perceived higher risk associated with self-employment.
Based on our research, five lenders may accommodate self-employed borrowers when refinancing student loans. Click the link to read our full review for each lender.
- SoFi considers factors such as your credit score, education, financial history, career experience, and monthly income versus expenses.
- LendKey does not provide specific income requirements. Eligibility depends on factors such as credit history and your overall financial situation.
- Laurel Road considers credit history, total monthly debt payments, and income when determining eligibility and rates.
- Citizens Bank requires a gross income of $12,000 to refinance student loans.
- Earnest does not state a minimum income, but applicants must have a job and a steady income.
It’s important to evaluate each lender for eligibility requirements and criteria to find the best fit. Each lender has underwriters who look at your situation and determine whether it fits the amount of risk the lender is willing to take on, so some lenders require more verification than others.
When applying with student loan refinancing lenders, most offer a soft-credit-check prequalification that won’t affect your credit score. For a personalized look at potential savings, check out our student loan refinancing calculator.
Should you refinance your student loans if you’re self employed?
Even if you qualify for refinancing as a self-employed borrower, we recommend you decide carefully. Here’s what to weigh:
Pros
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Lower interest rate
Refinancing could result in a reduced interest rate, saving you money.
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Shorter term
Opting for a shorter term might allow for faster loan payoff.
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Smaller monthly payment
Refinancing may decrease your monthly payment, easing your financial burden.
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Overall savings
You could save over the life of the loan by lowering the amount you pay in interest.
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Consolidation
Combine multiple payments into one, simplifying your financial management.
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Transfer or release
Some lenders allow you to transfer Parent PLUS loans to a child or release a cosigner, providing additional flexibility.
Cons
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Loss of federal protections
Refinancing federal loans into private loans means losing income-based repayment and forgiveness options. If income is unpredictable, these benefits might be essential.
Ask the expert: Are there particular considerations self-employed individuals should be aware of when weighing federal protections against the potential benefits of refinancing?
Crystal Rau, CFP
As a rule of thumb, you should never borrow more than you expect your salary to be. If you owe more than your business makes, it might be wise to stick with federal loans, which offer financial hardship options and income-driven repayment plans.It will depend on your situation; there are many factors to consider. If you’re struggling to determine whether you should stick with federal loans or refinance to a private loan, I recommend working with a financial professional who specializes in student loans.Refinancing makes sense when you have reliable income, can secure a lower interest rate, and don’t need federal protections. It doesn’t make sense when you rely on federal protections or the new terms don’t offer significant benefits.
Here are two examples of how student loan refinancing can work for a self-employed individual:
- Lily owns a floral shop and has had roughly the same income for the last five years. With 10 years left of repayment on her current student loan, she decides to refinance at a lower interest rate and the same term length, which allows her to save monthly and over the life of the loan.
| Pre-refinance | Post-refinance | |
| Balance | $25,000 | $25,000 |
| Fixed interest rate | 7% | 4% |
| Repayment term | 10 years | 10 years |
| Monthly payment | $290 | $253 |
| Total loan cost | $34,800 | $30,360 |
- Sam is a freelance photographer who loves his job, but the income can be volatile. Sam has an excellent credit history because he’s always managed to make his payments, but he’d feel less stressed if he could lower his payments. He chooses to refinance with a lower rate but longer term, getting a lower monthly payment but paying more over the life of his loan.
| Pre-refinance | Post-refinance | |
| Balance | $25,000 | $25,000 |
| Fixed interest rate | 7% | 5% |
| Repayment term | 10 years | 15 years |
| Monthly payment | $290 | $165 |
| Total loan cost | $34,800 | $36,900 |
Both scenarios illustrate the trade-offs and considerations a self-employed borrower might face when deciding whether to refinance student loans. Be sure your decision aligns with your financial situation and long-term goals.
Alternatives to refinancing student loans when self-employed
If you’re self-employed and don’t qualify for refinancing or aren’t sure it’s the right choice, you might seek alternatives to consolidate or lower your interest rate.
Being self-employed often means dealing with income fluctuations, which might require a different strategy for managing student loans. Here are options that are suitable for self-employed individuals’ needs:
For federal loans
- Consider a Direct Consolidation Loan: This option allows you to consolidate all your federal student loans into one federal loan to simplify your payments. The interest rate is calculated as an average of all your current interest rates, so you don’t see significant savings, but it might be beneficial if you’re juggling the responsibilities of running your own business.
- Apply for income-driven repayment (IBR): IBR plans calculate your payment amount as a percentage of your income. Payments are adjusted annually, which can be helpful if your income changes substantially year over year.
For private student loans
If now isn’t the right time to refinance, consider the following:
- Refinancing with a cosigner: A cosigner may enhance your eligibility if you face challenges in refinancing due to lack of income predictability in your self-employed status.
- Boost your credit score: Taking measures to improve your credit score can make refinancing more attainable, even if your income is variable. This includes reducing your debt-to-income ratio and being consistent with on-time payments.
- Increase your income: If feasible, increasing your income through diversifying your business might create more options for refinancing.
- Reach out to your lender: Your lender might be willing to work with your unique financial situation as a by adjusting payment amounts or terms.