How Student Loans Impact Your Debt-to-Income Ratio

Student loans can have a significant impact on your finances, both while you’re in school and long after you’ve graduated. One key area where student loans make a difference is your debt-to-income (DTI) ratio.

Your DTI ratio compares how much debt you have to your income. It’s a metric lenders use to determine your ability to take on additional debt. The higher your DTI ratio, the less likely you’ll qualify for loans like a mortgage.

Understanding how student loans affect your DTI can help you make smart borrowing decisions as a student. It can also help you take steps to reduce your ratio later on so you can access other lending opportunities.

What Is a Debt-to-Income Ratio?

Also known as a debt-to-income or DTI ratio, this important financial metric shows what percentage of your gross monthly income goes toward debt payments.

To calculate your DTI add up your monthly debt payments like

• Student loans
• Mortgage
• Auto loans
• Credit cards
• Personal loans
• Child support

Divide this total by your gross monthly income before taxes and other deductions. This gives you the percentage of income eaten up by debt obligations.

For example:

Monthly income: $5,000
Monthly debts:

• Student loans: $300
• Car loan: $450
• Credit card: $200

Total monthly debt = $950

$950 / $5,000 = 0.19

DTI ratio = 19%

Lenders prefer to see a DTI of 36% or less. Up to 43% may be acceptable with some lenders. If your ratio exceeds 50%, you may have trouble getting approved for new loans.

Why DTI Ratio Matters

Lenders check your DTI ratio when you apply for new credit like a mortgage, auto loan, or private student loan refinancing. They do this to assess if you can manage added monthly payments.

Borrowers with high DTIs may struggle to keep up with debt obligations when taking on more. This makes them higher risk applicants from a lender’s perspective.

Your credit scores also matter, but DTI provides additional insight into your capacity to handle repayment. Even with great credit, a high DTI may prevent approval.

DTI is especially important for mortgages. To get a conventional home loan, you’ll need a DTI of 43% or less in most cases.

How Student Loans Affect Your DTI

Any student loan payments you’re required to make are included when calculating your DTI ratio. The higher these monthly payments, the more student debt impacts your percentage.

For example: if your income is $5,000 per month and you have a:

• $1,000 mortgage payment
• $400 auto loan payment
• $500 student loan payment

Your DTI is 36% ($1,900 debt payments / $5,000 income).

But if your monthly student loan payment was just $200, your DTI would be 32%.

As you can see, student loans can quickly inflate your ratio, reducing the amount you can comfortably borrow for other needs.

Student Loans in Deferment or Forbearance

If your federal or private student loans are in deferment or forbearance, you may get a temporary DTI reprieve.

These programs allow you to temporarily halt payments. But this doesn’t necessarily mean lenders ignore the loans when calculating your ratio.

Federal Student Loans

For federal student loans in deferment or forbearance, lenders may:

• Count a monthly payment equal to 1% of your total balance
• Use 0.5% of the remaining balance
• Exclude payments if you’ll be done with the deferment/forbearance and have 10 months or less left on the loans
• Not count the loans if you qualify for forgiveness at the end of the deferment/forbearance period

Check with your lender to see how they handle federal student loans in deferment/forbearance. Policies can vary.

Private Student Loans

Private student loans in deferment or forbearance may or may not be excluded from your DTI depending on several factors:

• The lender’s policy
• Type of new loan you’re seeking
• Length of the deferment/forbearance period
• Loan forgiveness eligibility

Again, it’s smart to ask up front to understand how deferred or forbearing private student loans count toward your ratio.

How to Reduce Your Student Loan DTI

If your DTI ratio is too high because of student loans, here are some strategies to consider:

• Make extra payments to pay off high-interest private loans faster
• Refinance student loans at a lower rate to reduce monthly payments
• Enroll in an income-driven plan for federal loans to potentially lower payments
• Apply with a cosigner who has great credit and low DTI to improve chances
• Pay down other debts besides student loans to directly lower your ratio
• Increase your income with a promotion, better job, or side hustle
• Extend your repayment term to lower monthly student loan bills (results in more interest paid over time)

Crunching the numbers to see how each option affects your DTI can help you choose your best route.

Ideally, you want to decrease your ratio and pay off student loans faster if possible.

Keep Student Loan DTI in Check as a Borrower

Today’s students are borrowing more than ever for college and graduating with unprecedented levels of student loan debt.

Managing your student loan DTI early on by borrowing only what you need and keeping payments affordable is critical. This gives you financial flexibility down the road to pursue other goals like buying a home, starting a business, or building your own family one day.

As a parent, it’s also smart to keep your student’s DTI in mind when applying for college financial aid and loans. The more debt they take on, the bigger the impact to their future borrowing capacity and financial independence after school.

Finally, don’t let high student loan DTI deter you indefinitely. Explore ways to tackle your loans faster so you can qualify for low-rate borrowing that builds wealth over time. With a plan and discipline, you can shrink a problematic ratio to open up new financial opportunities.