Student Loans: Refi Denied TWICE – 6 Takeaways

HEADLINE: Working Dentist with Good Credit Applies to Refinance Student Loans and Gets Denied Twice

Just a few months ago, shortly after we were married, my wife and I knew it was time to get serious about our student loans. We mapped out her student loan debt and decided we should make a decision: whether to refinance and aggressively tackle the debt OR make minimum monthly payments through the federal government’s income-driven repayment plans and hope to have the loan forgiven after 20-25 years. After a little back and forth debate we chose the former. (Check out how we made our decision here)

The obvious next question: What loan refinance company do we move forward with?

(Before I continue I just want to make clear that I have NO DISCLOSURES. I do not receive money from any loan refinance company. I also have no affiliations.)

I read every pertinent website at an attempt to decipher my options, but I kept coming to the same realization. Very few of the website authors had actually gone through the process themselves. Additionally, no one was trying to refinance a loan of half a million dollars.

I started reaching out to my peers. These were colleagues in the same financial situation with massive student loans, but most of them had done nothing to address their debt (largely because they didn’t have the means). I’ll never forget one of my friends saying, “it’s just Monopoly money at this point”.

After finding a select few who refinanced, I proceeded with the company most overwhelmingly endorsed by my peers, First Republic Bank, which was offering the most competitive rates (as low as 1.95%). One downside, they only provide services in specific regions of the country, which means borrowers are limited by geographic locations (areas of CA, OR, MA, NY, CT and FL).

Lucky for me, I live in a northern California region serviced by First Republic so I eagerly and optimistically applied.

Unlucky for me (and my wife), after several weeks of correspondence, we were denied for the following reasons:

• Excessive obligations in relation to income
• Insufficient liquidity
• Lack of strong secondary source of repayment

This was an obvious failure from the standpoint of still owing a student loan that was accruing at an average interest rate of 7%. But it was a success in that I learned more about refinancing than I ever wanted to.

With that new-found knowledge, we optimistically applied to a second company called Education Loan Finance after a series of preliminary applications showed them to have the second most competitive rates. We were quickly met with the same result. Denied due to:

• Debt ratio
• Unable to verify significant information from the application

While the second reason for denial was unclear (and ELFI provided no explanation), the first was similar to what we previously encountered. Our debt-to-income ratio was simply too high. From our two consecutive denied applications, here’s what we learned about refinancing:

 

1) Having a decent income and good credit score may not be enough.

Our total loan amount is upwards of $500K, which is not out of the ordinary for many new dentists. My wife and I both work full-time as dentists. My wife has an average associate salary (about $120K) and has established good credit (>750). With the addition of my higher salary and higher credit score, we were still denied twice! Unfortunately, good credit and decent salaries are just a portion of the qualification criteria.

 

2) Loan companies want applicants with a competitive debt-to-income ratio.

It is common knowledge that loan companies need to know your credit history and income, but the bulk of the underwriting process centers around how the money you bring in stacks up against the money you owe. For newer dentists, this puts us at an extreme disadvantage.

Here’s a simple way to calculate your debt-to-income ratio:

While each loan refi company has a “proprietary underwriting process” the upper limit DTI ratio for most companies is around the 40% range. With that being said, a quick calculation of my wife’s DTI ratio yields a number closer to 60% (which is likely not much different from most other dentists <5 years out). For anyone with this amount of loans, it is very difficult to qualify without a cosigner, which brings me to my next point.

 

3) Co-signers can make all the difference.

In some instances, a co-signer can change a loan denial into a loan approval. In other instances, a co-signer can be the difference between a 6% interest rate or 5% interest rate (in our case our interest rate did drop by 1% by adding a cosigner). While a single percentage point may not sound like much, over the life of a $500K loan, that could easily translate into >$50,000.

Additionally, some companies allow you to apply with more than one co-signer. Depending on the loan company, they may consider each additional co-signer in the total DTI ratio calculation or they may consider each person independently. For instance, Education Loan Finance (ELFI) will only consider the income of one individual and will not combine the incomes of both the primary applicant and the cosigner. In this case, a cosigner may not be helpful unless they make significantly more money. Ultimately, proceed with caution and research each cosigner policy before choosing who to apply with.

 

4) Rates can vary significantly by amount borrowed and loan terms.

While some companies offer lower interest rates for shorter loan terms, others might offer lower rates on longer terms. There isn’t a universal formula for interest rate calculations. This is partly due to fluctuations in the market, but also due to the individuality of each applicant’s financial situation.

 

5) Every loan refinance company has a proprietary underwriting algorithm.

Whether it is a specific percentage of liquidity or a specific debt-to-income ratio, each loan refinance company has a proprietary algorithm used in the calculation of a loan term and rate. This explains why we were denied twice prior to approval. In addition, full applications typically must be submitted before finalized interest rates are presented. The concern here is that attached to each application is a hard credit check that has the potential to affect an applicant’s credit score. As I learned the hard way, it can be difficult to gauge your strength as an applicant prior to the completion of the application process.

 

6) Choose your loan refinance company carefully.

This last point almost goes without saying, but I learned first-hand from my experiences that not all refi companies are created equally. There are nuances to each company’s plans and policies. Additionally, each application has unique criteria. For example, SOFI requires a two year history of pay stubs for any second job. This became difficult for my wife as an associate with two different employers. We will discuss the application criteria in more detail in a future post.

 

BOTTOMLINE: With today’s dental school loans, a solid salary (>$120K) and good credit (>750) just might not be enough.

 

Have you refinanced a substantial student loan? What have you learned from your process? We’d love to hear your thoughts.