Can You Refinance Student Loans When Self-Employed?

Self-employed people make up a good portion of the workforce with approximately one out of nine U.S. workers in 2009. That means 10.1 percent of the American workforce was self-employed that year.

The self-employed workforce consists of a broad range of people. Some only went to high school while others attended two- or four-year institutions. Some even received their master’s or doctorate degrees before starting their own businesses.

Many self-employed people who went to college took out student loans to fund their education, making them a part of the trillion-dollar student debt tally that graduates in America owe.

Student loan refinancing can help them get back on track with better interest rates, but it takes a bit of research to know if you’ll be eligible.

What is Student Loan Refinancing?

Student loan refinancing refers to obtaining a new loan and using it to pay off the old loans. The new loan should have a lower interest rate, saving the borrower money.

Let’s look at some numbers to understand how beneficial this is. In 2013, the interest rate for federal student loans was 6.8 percent. Many private student loans were as high as 12 percent. Interest rates on refinanced student loans can fall below both of these marks.

Consider a borrower who owes $50,000 in student loans and pays 6.8 percent interest. If that borrower refinances to 4.82 percent interest, he or she would save close to $6,000 in the course of ten years. Refinancing is obviously an attractive option, but only two percent of borrowers took advantage of it in 2016. Why?

One reason might be that the self-employed don’t know if they’ll qualify.

Refinancing When Self-Employed

Refinancing is possible when self-employed, but there are things to keep in mind.

First, the lender will need to see tax returns as proof of income. This can be complicated for self-employed individuals. They have their returns, but their returns aren’t always good way to prove income.

Many people use write-offs to lower their tax burden. It’s one of the perks of owning a business. However, the lower the income, the less likely the person is to get approved without a co-signer.

Those who have the time to play the long game are encouraged to avoid major write-offs for two years prior to applying for refinancing. At the same time, it is beneficial for the borrower to show growth from one year to the next. That shows lenders that the business is profitable and growing.

If that is not possible, talk to the lender directly when trying to refinance. Large deductions for one-time supplies should be explained. For example, someone who owns a construction business might buy trucks for the job. This one-time purchase costs tens of thousands of dollars and cuts into the adjusted gross income.

Some lenders will understand that a one-time purchase cut into the overall income for the year. These lenders also understand that the deductions were for one-time expenses and won’t carry over to the following year. Borrowers might have to contact several lenders to find one who is understanding.

Credit scores are also very important when refinancing student loans while self-employed. Some people are approved for refinancing with credit scores as low as 560, but that is unlikely with someone who is self-employed. The average refinancing score is 757, so borrowers should do their best to hit that, if not higher.

Borrowers also have the option of going with a co-signer. A co-signer with a traditional job makes it easier to get approved. This mitigates the lender’s risk. Creditworthy parents and spouses make excellent co-signers for self-employed people.

Refinancing might be more difficult for the self-employed, but it is still an option. Those who are self-employed are still encouraged to try to get better rates through refinancing. Better rates make borrowers less likely to default on their loans and owe less on their debt. This helps both the borrower and the lender.

If you are unsure if refinancing makes sense for you, check our our Should I Refinance My Student Loans Guide.