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If you just graduated from a US college or graduate school as an international student, you may be starting to explore making payments on your student loans. In some cases, you may find that your payments are quite high or you may wonder if you can switch to a lower interest rate.
International students are eligible to refinance their student loans under certain circumstances.
What is student loan refinancing?
Student loan refinancing means paying off your current student loan with a new loan. Compared to the original loan, the new loan has a lower interest rate and better terms like lower monthly payments.
Refinancing is a strategic way to make loan payments more manageable, reduce interest payments or get out of debt faster.
Why would international students want to refinance student loans?
After completing your US education, you may have more loan options. You may consider refinancing to modify the terms of your international student loan and to take advantage of better loan terms.
Your required monthly payments are too high
If you are struggling to meet your required monthly student loan payments, refinancing is a possible solution. For instance, you have to pay $600 every month, but you would be more comfortable with paying only $400.
In this case, refinancing may help in two ways: it may reduce the interest which may reduce the monthly payment or it may extend the term of the loan (the number of years) which may reduce the monthly payment (or it may do both)
Your interest is too high
Refinancing can help you take advantage of lower rates. Interest rates for international student loans can be 8% or even higher. Certain lenders cater specially to international students including Prodigy Finance and Quorum Federal Credit Union. Each of them usually lends at around 8-9%. If you refinance, you may be eligible for rates as low as 4%.
For instance, you borrowed $78K at 8.25% for 20 years. If you have the option to refinance at 6.55% when your balance is $60K, you can save around $18K in interest.
You want to pay less interest overall and pay off the loan faster
Most international student loans have a maximum term of 20 years. If you refinance at a lower rate and reduce the term, you can pay off the loan faster. The monthly payments may be higher but you will be debt free in a shorter amount of time.
You want to release a cosigner
If you applied for a student loan with a cosigner and your lender has no cosigner release program, you may want to consider refinancing. When you refinance the loan, you may be able to arrange for the loan to be in your name only or add a new cosigner. Adding a cosigner may entitle you to a lower interest rate or better loan terms.
Challenges US Visa Holders Face When Trying to Refinance Student Loans
Refinancing may be an option, but international students sometimes find that they will have trouble being approved. If you are a non-citizen staying in the US on a temporary visa, lenders consider you a relatively high-risk client for a variety of reasons.
People with insufficient credit history have trouble getting approved for student loan refinancing
Having a credit score of at least 690 increases your eligibility for international student loan refinancing. While it’s tough to build your credit history while studying it is still possible. Some things you can do include:
Opening a bank account
Getting a secured credit card and using it responsibly
Paying bills on time
You should also have a credit history of at least two years. Without proof of credit history, lenders may be skeptical about allowing you to refinance your loan onto their books.
Related Article | How US Immigrants Can Build Their Credit Score
International students often don’t have a US cosigner
Having a co-signer who is a US citizen or a permanent resident with a credit rating of at least 690 could increase your chances of getting approved for better refinancing terms. Your co-signer will pay the loan if you default and they add another layer of security for the lender.
Without a cosigner, you’ll need to prove your own creditworthiness by improving your personal credit score. This can be challenging for international students and US visa holders to do but it is possible.
International students may have temporary status in the US
Non-citizens who are not permanent residents pose more risk to a lender. If you are not a permanent resident or a Green Card holder, your stay in the country depends on your visa renewal. Even if you have a work visa, there is a possibility that your visa will not be renewed or extended. At present, there is much uncertainty about the status of temporary visa holders in the US. This is also one reason why most banks will require a cosigner who is a US citizen or a permanent resident.
Related Article: How Much Income Tax Will I Pay While Working On An H-1B Visa?
Lenders consider international students "high risk" because they may leave the US permanently
If you default on your loan and you leave the country with no plans of returning, it is challenging for a lender to force you to pay. Your US credit history will be affected for the next seven years, but that may not deter you. For this reason, lenders consider you high risk and may not want to refinance your loan.
What do you usually need to refinance student loans?
Eligibility requirements for student loan refinancing tend to be stricter than the requirements for the initial disbursement of student loans for tuition. Each lender has different rules about who can refinance student loans. Lenders will look for the following characteristics in a refinancing application to determine whether they can approve you:
Permanent Employment with a Stable Company
You will have better chances of getting lower interest rates if you have a job offer or you have secured employment in a stable company.
It is not enough for you to be employed. Your employment will need to be with a stable and established company. Lenders may shy away from refinancing your loans if you work at a small or unstable company. Lenders may also look at the type of work that you do and gauge whether it would be easy for you to find a new job if you get fired.
Debt-to-Income Ratio of No More Than 43%
Your debt-to-income ratio is one of the things lenders will consider. This ratio is computed by dividing your monthly debt payments by your gross monthly income. If your debt ratio is less than 43%, you have a higher chance of being able to refinance. What is a debt ratio? For example if you have a $1000/mo rent payment and a $200/mo auto payment and you earn $5000/mo, your debt ratio is $1200 divided by $5000 or 24%. A bank will look at your debt ratio and determine that you have plenty left over every month to make payments on an additional debt.
Credit Score of at Least 690
In the US, most lenders will only consider your US credit record. If you have not invested in building a strong credit history in the US, you should do that before you apply for refinancing.
Valid Visa With Likely Renewal
On the date you apply for student loan refinancing, you must have a valid visa with a validity of at least two years. If your visa is ending soon, you should renew it prior to applying for refinancing so that the lender isn’t concerned about your ability to stay in the US.
Related Article: How to Pick Visitors Insurance For Family Visiting The US?
Strategies for International Students Looking to Refinance Student Loans
There are several ways to refinance your student loan if you are looking for a better payment plan. These options include the following.
Option 1: Take a low-interest loan from a family member or friend
If you have a friend or family member with the resources and who is willing, you may be able to offer them an opportunity to help you refinance your student loan and receive interest income in exchange.
If you decide to do this, it is best to have an attorney draft the contract and make sure everything is in writing including the terms of the loan, the monthly payment, any penalties, and the interest rate.
For written family loan contracts, you should be careful to select a realistic interest rate. If the interest is too low, the IRS may consider the loan a gift and may be subject to gift tax.
Take note that the donor has to pay the gift tax. US citizens, Green Card holders, resident aliens and nonresident aliens can give up to $15K without paying any gift tax. Except for nonresident aliens, the excess will count towards the lifetime estate tax exclusion of $11.4M (recently raised in the 2018 tax law and expires in 2025. The exclusion may be lowered in the future).
Option 2: Apply for a personal loan to pay off your international student loan
There are several options for US visa holders to take out personal loans. If you are strategic, you can use these loans to pay off your student loan. You might decide to do this if the interest rate you are offered on a personal loan is better than the interest rate on your student loan.
However, this strategy has disadvantages. By doing this, your new loan will be a personal loan, not a qualified student loan. For some taxpayers, up to $2500 of student loan interest paid each year is tax deductible, and you would lose this tax benefit if opt to transform your student loan into a personal loan. The interest on personal loans is not deductible.
Some lenders that refinance international student loans into personal loans include:
Considers non-citizen loan applicants
A credit score between 600 and 700
Income considered is usually between $40K to $100K
Interest rates: Varies by state and is usually between 9.95% to 35.99%
Learn more here: https://www.avant.com
Serves as a marketplace matching both US citizens and non-citizens to lenders
Requirements vary by lender
Interest rates: As low as 4.24%
Learn more here: https://www.nomadcredit.com
Option 3: Refinance your international student loan through a private student lender
J-1, H-1B, E-2, O-1 or TN visa holders may be able to private student loan refinancing from select companies. These companies include:
Offers refinancing for H-1B, J-1, L-1, E-2, and E-3 visa holders
Graduate with at least a Bachelor’s degree
Residence in an eligible US state
Interest rates: 2.49% to 8.07% APR
Learn more here: https://www.commonbond.co
Offers refinancing for international students studying in the UK or the US with an F1-OPT, H1B, L1 and O-1 visa and other valid visa types for international students
UK or US address. If you are in the US, you should live in one of these states: AK, CO, DC, FL, GA, IL, KS, KY, MD, NE, NH, NJ, NM, NY, NC, OK, OR, PA, SC, TN, TX, UT, VA, WI. UK residents should pursue a program in the UK and US residents should be studying in the US.
Graduate of a university supported by Prodigy
Interest rates: 4% plus LIBOR rate (currently at 2.5%) capped at 25%
Learn more here: https://prodigyfinance.com
Offers refinancing for US citizens, Green Card Holders, and individuals holding a J-1, H-1B, E-2, O-1, or TN visa with at least two years before visa expiry
Employed, has sufficient income from other sources or has a job offer with a start date of within 90 days from the date of the loan application
Strong monthly cash flow
Responsible financial history
Interest rates: 2.49% to 9.95%
Learn more here: https://www.sofi.com
Offers refinancing for US citizen or a resident alien with a Green Card who can present a Valid I-55 Form.
Graduate of at least a Bachelor’s Degree or an Associate’s Degree specified by Laurel Road
Good Credit Score
Interest rates: 2.55% to 7.02%
Learn more here: https://www.laurelroad.com/
Related Article: International Student Employment Options After Graduation
Related Article: What You Need To Know About Money And Student Visas
Consider All International Student Loan Refinancing Options Wisely
International student loan refinancing may be challenging but it is worth pursuing a better interest rate if you can find one. Before you move forward with refinancing, be sure to consider the new interest rate, loan term, any lender fees, and tax implications. An experienced financial and tax advisor like MYRA can help point you in the right direction about whether and how to refinance your international student loans.