The freedom and independence that comes with being your own boss is a major lure for the 10% of Americans in the labor market who choose to go this route, according to the Bureau of Labor Statistics. However, this freedom comes with unique challenges as a self-employed student loans, notably variable income that can swing considerably from one month to the next. Consistent financial obligations like student loan payments might become more challenging to manage when income is inconsistent.

For self-employed student loans individuals grappling with student loan repayments, it may require navigating some additional challenges.

Student Loan Refinancing

To obtain more advantageous terms, such as lower interest rates, flexible payback periods, and manageable monthly payments, borrowers can consider refinancing their student loans with a private lender.

A large amount of your monthly payment goes toward interest on a student loan with a current interest rate of 6%, for instance. If you refinance to a loan with a lower interest rate, say 3 percent, more of your payment will go toward paying off student loans when self-employed the principal.

Guide to Refinancing Student Loans

The likelihood of income fluctuation is higher for self-employed people, which can make it difficult to make ends meet during leaner times. Both federal and private student loan refinancing options for entrepreneurs are discussed here.

Private Student Loans

Typically, lenders verify income for borrowers in full-time employment via pay stubs. Self-employed borrowers, however, can demonstrate their income through tax returns, profit and loss statements, or federal 1099 forms. For instance, Citizens Bank, as of December 2022, mandates that self-employed student loans when self-employed applicants provide two years of tax returns, Schedule C documents, and profit and loss statements when applying for a loan.

Federal Student Loans

Federal student loans offer more borrower protections compared to private student loans. These include forbearance and deferment options, access to income-based repayment plans, and potential loan forgiveness. Before opting to refinance, federal loan borrowers should thoroughly consider all available options, especially given the May 2023 U.S. Supreme Court case potentially leading to forgiveness of up to $20,000 in federal student loan debt for over 44 million Americans.

If you choose self-employed student loan forgiveness to refinance your federal student loans through a private lender, the requirements for income verification documents should be similar to those for private student loans.

How Self-Employment Affects Interest Rates

A higher credit risk is associated with self-employment, which may reduce loan eligibility or increase interest rates for certain types of loans like mortgages. However, for student loan refinancing, career choice doesn't typically impact interest rates. Lenders usually focus more on borrowers' financial health, including credit scores, as noted by Randy Gearhart, vice president of consumer lending at Citizens Bank.

Strategies for Successful Refinancing

If your income or credit score doesn't meet lender criteria, several strategies can enhance your loan approval chances. These include:

Securing a co-signer: A friend or relative with good credit can co-sign your loan, which can enhance your chances of approval. However, they will be held responsible for the loan if you fail to make payments.

Improving your credit score: If you have time before refinancing, aim to enhance your credit score by making all payments on time, diversifying your credit, and paying down existing debt.

A side job: You may need to have a second job in order to satisfy the lender's income standards. You might have a better chance of getting a loan if you apply to a lender that takes into account supplemental income.

FAQs

I'm self-employed with a variable income; can I still refinance my student loans?

Absolutely. While the variable income nature of self-employment and self-employed student loan forgiveness can pose challenges, many lenders are willing to work with self-employed individuals. They'll typically ask for different forms of income verification, such as tax returns, profit and loss statements, or federal 1099 forms. Before applying, you should research the individual lender's requirements.

Will being self-employed affect my interest rates when refinancing student loans?

If you're self-employed and looking to refinance your student loans, it shouldn't alter the interest rate you're offered. When determining interest rates, financial institutions typically look at things like your credit score and overall financial health. To acquire the best rate, though, you should look at many loan options and look around.

What if I'm not able to refinance my college loans because I'm self-employed?

There are ways to increase your chances of approval if your application was turned down because of your credit history or income level. One solution is to find someone to co-sign the loan with you who has excellent credit.