Do Student Loans Count Against Debt to Income Ratio?

Student loans are a huge financial burden for millions of Americans. With the cost of higher education skyrocketing, more and more students are taking out loans to pay for college This leaves many graduates starting their careers already deep in debt

One question that often comes up is how student loans affect your debt-to-income (DTI) ratio. Your DTI ratio is an important factor that lenders look at when determining your creditworthiness for loans and credit cards.

So do student loans count against your DTI ratio? The short answer is yes. Student loans are considered debt, so they are included when calculating your DTI. However, there are some nuances to understand about how different types of student loans affect your ratio differently.

What is Debt-to-Income Ratio?

Your debt-to-income ratio compares how much debt you have to your income It’s calculated by dividing your total monthly debt payments by your gross monthly income,

For example, if your total monthly debt payments equal $1,500 and your gross monthly income is $5,000, your DTI is 1,500/5,000 = 30%.

Lenders usually like to see a DTI of 36% or less when considering applicants for loans and credit cards. A high DTI over 50% will make it very difficult to get approved.

How Student Loans Affect DTI

When calculating DTI, the lender will look at your credit report to tally up all your monthly debt payments. Any outstanding student loans will be included in this calculation.

The higher your student loan monthly payments, the higher your DTI will be. Since most lenders prefer to see DTI below 36%, high student loan payments could push your ratio over that threshold and jeopardize your chances of getting approved for financing.

For example:

• Gross Monthly Income: $5,000
• Non-student loan debt: $800
• Student loan payment: $500
• DTI = ($800 + $500) / $5,000 = 26%

In this case, the $500 student loan payment is manageable and keeps the DTI at a favorable level. But watch how the ratio changes with higher student loan payments:

• Gross Monthly Income: $5,000
• Non-student loan debt: $800
• Student loan payment: $1,200
• DTI = ($800 + $1,200) / $5,000 = 40%

With the student loan payment increased to $1,200, the DTI is now over the 36% threshold that most lenders want to see.

So the bottom line is that the higher your monthly student loan payments, the more negative impact they will have on your DTI ratio.

Federal vs. Private Student Loans

Federal and private student loans count against your DTI differently:

Federal Student Loans

The good news is that if you’re on an income-driven repayment (IDR) plan for your federal loans, you may be able to use your reduced IDR payment amount when calculating DTI instead of the full standard payment.

IDR plans like PAYE and REPAYE allow you to make affordable monthly payments based on your income and family size. So your payment could be as low as $0 per month.

Many lenders will allow the IDR payment to be used for DTI, rather than your higher standard payment, if you provide documentation of your enrollment in the IDR plan. This can keep your ratio lower.

However, some more conservative lenders may still use the full standard payment, so check with the lender first.

If your federal loans are in deferment or forbearance where payments are temporarily paused, the lender may calculate an estimated payment using 1-2% of your total balance.

Private Student Loans

For private student loans, you won’t have access to income-driven plans. So there’s no way to reduce the monthly payments like with federal loans.

Whatever payment amount is listed on your credit report for private loans will be used when calculating DTI. You can’t ask the lender to consider a lower payment option.

The lack of flexible repayment plans for private loans is something to think about if you plan to take them out. The set monthly payments will be incorporated into your DTI for their full amount.

Ways to Improve Your DTI

If your DTI is too high because of large monthly student loan payments, here are some options to consider:

• Enroll in an IDR plan – As mentioned above, this can potentially replace your actual payment with a more affordable income-based amount when calculating DTI. Just be sure to provide documentation to the lender.

• Make extra payments – Any extra you pay toward your highest-interest student loans lowers the balance, which in turn can reduce your monthly payments and improve DTI over time.

• Refinance student loans – Student loan refinancing lets you take out a new loan at a lower interest rate to pay off your existing loans. This can lower your monthly payments and potentially improve your DTI.

• Pay down other debts – Reducing credit card balances and other non-student loan debts will also help lower your DTI.

• Increase income – A higher income means you can take on more debt while maintaining an acceptable DTI. Look for ways to earn more at your job or pick up side income.

How Much Student Loan Debt is Too Much?

As a general guideline, total student loan debt that exceeds your annual starting salary is considered high and could hurt your DTI. If your debt is more than 1.5 times your income, that is very concerning.

For example, if you owe $40,000 in student loans but your first job after graduation only pays $30,000 per year, that 4:3 debt to income ratio would be considered high and detrimental to your DTI.

Aim to keep your total student debt as low as possible. A good rule of thumb is to borrow no more in loans over 4 years than you expect to earn in 1 year at your first job after graduation.

Talk to Your Lender

If you are concerned about student loans hurting your chances of qualifying for a mortgage, auto loan, or other financing, have an open conversation with the lender.

Explain your student debt situation and current loan payments. Provide documentation about any income-driven repayment plans you are enrolled in. This gives the lender all the details to make an informed decision.

With federal loans, you may be able to negotiate using your affordable IDR payment amount to calculate DTI instead of the higher standard payment. It never hurts to ask!

Weigh the Benefits of a Degree vs. Debt

Before borrowing tens of thousands of dollars in student loans, be sure to consider whether the expected increase in earnings from your degree will outweigh the costs.

Run the numbers to estimate your total student loan payments, and how much additional income your degree needs to generate in order to come out ahead financially.

A college degree is not a golden ticket anymore. Make sure it makes sense for your situation before taking on large debt loads that will hurt your DTI for years.

Student loans definitely count against your debt-to-income ratio, which can jeopardize your ability to qualify for financing. Work to minimize debt levels and monthly payments. Enroll in income-driven plans for federal loans whenever possible. And maintain open communication with lenders to improve your chances of approval.

With prudent planning, student loans do not have to be a DTI dealbreaker, and you can still achieve your goals of higher education and home ownership.