Reasons Why Student Loan Application May Face Rejection

Many Indians aspire to pursue higher education, but achieving this dream often requires considerable financial support. While student loans are available to help students manage their educational expenses, there’s always a chance of student loan application rejections. Factors such as limited credit history, insufficient income, and inaccuracies in application details can hinder the approval process.

In this article, we will discuss 9 common student loan mistakes that can lead to application denials. Understanding and avoiding these pitfalls is essential for a smoother education loan approval process. Additionally, we will explore how personal loans for higher education can be a viable alternative to traditional student loans.

Why Your Student Loan Application May Face Rejection

The student loan application process can be lengthy and comprehensive. Lenders scrutinise various aspects of an applicant's profile to assess their creditworthiness and ability to repay the loan. Let's look into the primary reasons why your student loan application might be turned down.

1. Insufficient Credit History

When applying for student loans, your credit history (or lack thereof) can significantly impact the lender's decision. Lenders typically require a credit score above 700 to qualify for a student loan. Without an established credit record, you may be viewed as a high-risk borrower.

To build credit, consider becoming an authorised user on a parent's credit card or applying for a secured credit card. Regular, on-time payments can help establish a positive credit history.

2. Inadequate Income or Employment

Lenders need assurance of your ability to repay the loan. If you're relying solely on part-time work or internships without a stable income source, your student loan application may be rejected.

Consider seeking a part-time job with consistent hours or a paid internship in your field of study. This not only provides income but also demonstrates responsibility and work ethic to potential lenders.

It is important to note that an income source may not be mandatory if you’re applying with a co-signer or providing collateral.

3. High Debt-to-Income (DTI) Ratio

Your DTI ratio is a crucial factor in the education loan application process. A high DTI indicates that a significant portion of your income is already committed to existing debts. Lenders generally prefer a DTI ratio below 30%.

To improve your DTI, focus on paying down existing debts and avoid taking on new financial obligations before applying for a student loan.

4. Incomplete/Inaccurate Application

Sometimes, the reason for student loan rejection may be as simple as errors in your application or missing documentation, which can be easily rectified. Ensure all required fields are filled out accurately and provide complete supporting documentation.

Consider having a parent or trusted advisor review your application before submission to catch any errors or omissions. A well-prepared student loan application can make all the difference between approval and rejection.

5. Lack of Collateral or Co-Signer

Many lenders require a co-signer to secure the loan, especially for larger amounts. A qualified co-signer with a strong credit history or collateral can strengthen your application. Without these, your education loan application may be rejected.

If you're struggling to find a co-signer, explore government-backed loan options or lenders specialising in student loans without co-signers. However, be prepared for potentially higher interest rates.

6. Institution Not Approved

Some lenders may have specific student loan eligibility criteria related to your chosen field of study or the institution you plan to attend. Lenders maintain lists of approved schools and programmes. Not all institutions qualify for student loans.

When submitting your education loan application, ensure your chosen institution meets the lender's approval criteria. If it's not, consider reaching out to the school's financial aid office for guidance on alternative funding options or other lenders who may approve loans for your institution.

7. Academic Performance

Your academic record plays a pivotal role in securing a student loan. Poor grades or a history of failing courses can raise red flags for lenders. Most require a minimum academic performance threshold, often around 50% or higher.

If your grades are below par, consider explaining any extenuating circumstances in your student loan application. Additionally, demonstrate your commitment to improvement by enrolling in tutoring programmes or seeking academic counselling.

8. Existing Default or Bankruptcy

A history of defaulting on loans or declaring bankruptcy significantly affects your eligibility for new loans. Lenders are hesitant to extend credit to individuals with a track record of financial mismanagement.

If you've faced such challenges, focus on rebuilding your credit and financial stability. Consider credit counselling services to help develop a plan for improving your financial situation.

9. Age Limitations

Some lenders impose age restrictions on applicants. Typically, students must be at least 18 years old to apply independently, but there may also be upper age limits depending on the lender's policies.

If age is a barrier, explore lenders with more flexible age requirements or consider alternative financing options, such as scholarships or grants specifically designed for your age group.

An education loan rejection can be disappointing, but it's often an opportunity to identify and address weaknesses in your application. Don't hesitate to ask the lender for specific reasons for loan rejection, as this information can be invaluable for future applications.

Personal Loan for Higher Education Financing

For students facing challenges with traditional education loans, personal loans for higher education can offer a practical alternative. Typically, personal loans don’t require collateral, making financing more accessible.

Alternatively, parent can apply on behalf of their child, eliminating the need for a co-signer if they meet eligibility requirements and have a strong credit history. Repayment tenures can be more flexible extending up to 60 months.

At SMFG India Credit, you can apply for personal loans of up to INR 30 lakhs* at interest rates starting from 13%* per annum. Check your eligibility and apply online to begin your educational journey.