There are millions of F-1/OPT/H-1B visa holders with student loans in the U.S. In the past few years, many companies started refinancing student loans for U.S. citizens at lower rates for highly creditworthy borrowers who with jobs and a stable income. While U.S. citizens get the benefit of lower rates, international students and work visa holders are not able to get lower rates because they are international.
We started Stilt to provide better financial services to immigrants in the U.S. and have been working hard at solutions to provide them access to credit. Student loans is one of the most common loans that these immigrants need. They are not served by current lenders because they are different and don’t fit in the current business models of these lenders.
We wrote this guide to give F-1, OPT, H-1B visa holders an overview of what is student loan refinancing and help them understand how they can get lower rates by refinancing their student loans with Stilt.
What is student loan refinancing?
A student loan refinancing means that you pay off your previous student loan with a new loan at a lower interest rate from another lender.
If you had a student loan from a bank before you started school, you are charged interest rates based on your future potential and possibility of payment after you graduate with a job. But after you graduate and secure a full time paid job, your risk of default is much lower compared to when you took the loan.
At this stage, you can take a new loan to pay off your previous higher interest loan. Since you are now a lower risk, your interest rate will be lower.
Why is interest rate on student loans lower than personal loans?
The interest rates are affected by a few things:
- Economy factors – the market sets the base interest rates called prime rates. They are based on many factors such as growth rate of the country, inflation, etc. They are constantly changing.
- Expected default rates (based on historical data) - This is broadly based on historical loan performance for loans over decades and they are mostly grouped by FICO bands.
- Personal factors – they only impact your interest rate. These are credit score, credit history, income, ability to pay back etc.
- Loan purpose – if you take a loan for gambling, it will be a higher risk loan compared to if you take a loan for home improvement or wedding.
The purpose of the loan and it’s use is one of the biggest factors for lower rates at an individual level. In the U.S. student loans are also backed by the government and there are policies in place to reduce default risk.
The most important policy for U.S. citizen student loans is that you cannot discharge a student loan in bankruptcy.
This means that even if you declare bankruptcy and default on all your other debts, you will still owe student loans. This is the main reason new lenders are able to offer student loans at lower rates than personal loans.
Why don’t most banks and financial institutions refinance student loans for F-1/OPT/H-1B visa holders?
There are a few factors that makes it difficult for banks and other financial institutions to give student loans to international students. Below is a list of those reasons:
- U.S. government makes majority of the student loans – The U.S. government took over student lending a few years ago. The government used to subsidize student loans by private lenders but they ended that program and started making 100% of the loans themselves.
- Student loans can’t be charged off – An official certified student loan at an accredited college or university can not be discharged in bankruptcy. They can only be discharged in cases of borrower death. This means you have to pay them back over your life (if you don’t payment them back during the agreed duration). As a result, the repayment risk is substantially lower. If international students leave the country, there is no recourse for those loans.
- Large loans and short visas – Students loans are usually pretty big. Average US student loan is $30,000. For university level courses, these loans are very high. For e.g. average loan size for an MBA is $100,000+. It takes many years, in some cases decades to pay back the loan. If a borrower doesn’t have a valid visa to stay in the country, it becomes extremely difficult for lenders to refinance loans for international students at lower rates.
- Securitization – Most private refinance lenders make money when they securitize the loans. In short, securitization is pooling multiple loans together and selling them to bigger banks, insurance companies, and other financial institutions. The interest rates on these pools of loans are slightly lower than the interest rate offered to the borrower and the company makes a spread. Securitization is only possible if the loan pool is big, average loan amounts is high and loan term is long. As mentioned above, you can’t get a big loan with a long term because of your visa status and no-recourse in case of default. This doesn’t fit well with the business model of current lending companies.
Why are interest rates for refinancing student higher for F-1/OPT/H-1B visa holders than U.S. citizens?
The student loan refinancing market is not set up to solve this problem for international students. The overall market is set up for extremely low risk, long term loans with large average loan size. As international students and OPT/H-1B visa holders don’t have a long enough visa to pay back the loans, they don’t fit in the business model of current lenders.
F-1/OPT/H-1B visa holders are seen as extremely high risk because:
- Their visa is not valid for long term
- If they lose their jobs because of recession or other factors, they won’t be able to stay in the country to find another job
- They can leave the country whenever they want and there is no recourse for loan repayments – it is essentially considered a default
The way market works combined with higher risk of non-U.S. citizens makes it almost impossible for F-1/OPT/H-1B visa holders to refinance their student loans in the U.S.
How can I lower my rates on refinancing my student loan?
The interest rates on student loan refinancing are based on your historical financial and non-financial data. It is not possible to change the history, but you can keep the below in mind for the future to lower your interest rates on student loans:
- Credit History – No credit history is better than poor credit history. It is important to have no late fees, delinquencies, and defaults on your credit accounts (credit cards, retail cards, auto loans, personal loans etc.) If you have a credit history, try to make sure you don’t make mistakes and keep it clean, so it’s a positive.
- Low debt to income ratio – The other thing is to not use excess credit compared to your income. If you have huge loans and have to make payments every month, there is less room for a mistake. If you lose your job or your salary is a little delayed, it may put you in debt trap with late fees, lower credit score and high interest rates.
- Positive cash flow – As you spend money, make sure you are saving some money every month and are cashflow positive. It means that you every month, you spend less than your income and there is some left over money. This is not a credit behavior, but borrowers with better cash flows can be more flexible and have a cushion for future. This is seen as a positive by lenders.
- No Derogatory Fees – overdraft fee, insufficient funds fee, etc. As you use your account with multiple services online, make sure you have enough money in your deposit account when you take that uber/lyft ride or make a purchase on amazon or pay your utility bill. These fees are extremely negative for your account both in terms of charges and their impact on your final interest rate.
- Good job with a stable company – It’s possible that you have employment, but working with a small company at a position that has high turnover rate. As your future is less stable, you will be seen as higher risk and charged higher interest rates. A stable job in an industry where if you lose your job, you can find a new one pretty quickly will help you lower your interest rates.
- Valid Visa – Make sure you have the right type of visa (F-1/OPT/H-1B/others) that is currently valid. If you are on F-1, you have the option to move to OPT and eventually H-1B. But if you are visa is ending soon with no path to renewal, it’ll be seen as higher risk.
How do I find out if I can refinance my loan?
The student loan refinancing for F-1/OPT/H-1B visa holders by Stilt doesn’t have a specific criteria, but below are some guidelines that’ll help you determine your chances of approval:
- A full time job or a job offer – If you have a full time job offer or currently working at a full time job, it’s a strong positive for your application.
- No delinquencies or defaults – You may not have a credit history and that is fine, but if you have been using credit cards and have built a credit history, make sure you don’t have multiple delinquencies and defaults.
- No excess bank fees – Sometimes you are charged overdraft and insufficient funds fee without knowing about it. For e.g. if you take uber and when they charge, you don’t have enough funds in your account, you will be charged a $34 insufficient funds fee. These fees show that you are not as financially responsible.
- Strong and positive cash flow – There should be some savings every month that can help you in an emergency situation. If you are saving money, it is a good sign of responsible financial behavior and can help you lower your interest rates.
- Valid visa – As you think about refinancing your student loan, make sure your visa is currently valid and if it’s ending soon, it should be easily renewable. For e.g. if you are on F-1 and about to graduate, there is a high probability that you’ll be approved for OPT if you have a job offer. This stability can help you lower your interest rates.
Is a credit history required to refinance my student loan?
Stilt doesn’t require you to have a credit history when you apply for refinancing your student loan. If you have an SSN and have been building a credit history, we will do a hard credit pull We do it for everyone, just to make sure we have a clear view of your financial situation. If you have a credit history, it will be considered and may impact your final interest rate.
Stilt is the only lender that offers student loan refinancing to F-1/OPT/H-1B visa holders. We use your comprehensive application to determine the lowest interest rates and the highest loan amount.
We are committed to providing access to credit to millions of international people in the U.S. who don’t get the benefit of the U.S. financial system because of their lack of credit history.