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Your debt-to-income ratio (DTI) is calculated by dividing your total monthly debt payments by your gross monthly income. Lenders typically want to see a DTI no higher than 50% from applicants who want to refinance their student loans. Understanding what your DTI is, how it’s calculated, and what you can do to improve it can help you get the right student loan refinancing for your needs.
- What is debt-to-income ratio?
- What DTI is needed to refinance student loans?
- How can you improve your DTI to qualify for refinancing?
- How does student loan refinancing affect your overall DTI?
- How does debt-to-income ratio affect a lender’s decision?
What is debt-to-income ratio?
Debt-to-income ratio is an indicator of how much of your monthly income is already earmarked to pay your debts. In general, a high DTI signals to lenders that you may not be able to afford your payments for a loan, since so much of your income is already going to other debts. In many cases, the maximum student loan refinancing debt-to-income ratio is 50% — but a lower DTI is better.
Generally, lenders like to see a DTI of 36% or lower for borrowers to qualify for the most favorable loan terms. However, many lenders will accept borrowers with a DTI of 45% or more if they have a good credit history and score.
Even if you have a DTI that’s 50% or higher, it’s still possible to refinance your student loans. The fastest way to do this is to apply with a cosigner who has a lower DTI. Your cosigner’s creditworthiness — including their DTI — can help you get the loan.
How to calculate your DTI
Add up your minimum monthly bill payments to all of your loans, including credit cards, student loans, car loans, or any other type of loan. Divide that total by your gross monthly income (the amount of money you make before taxes are withheld) to determine your DTI.
(Total monthly payments ÷ monthly income) x 100 = DTI
($1,500 ÷ $4,000) x 100 = 37.5%
At 37.5%, Mika’s DTI is probably low enough to qualify for a student loan refinance, depending on the lender.
What DTI is needed to refinance student loans?
Every lender has its own requirements for credit scores, DTI, and other factors needed to refinance student loans. Some refinancing lenders might prefer a much lower DTI than 50% while others give you a bit more wiggle room to go above that key number. Additionally, some lenders differentiate between a DTI that includes your mortgage or rent payment and a DTI without your housing payment.
For comparison, SELF Refi, a student loan refinancing program administered by the Minnesota Office of Higher Education (and not a Credible partner lender), has a maximum DTI of 45% plus a minimum FICO credit score of 700 to qualify for a refinance without a cosigner. To qualify with a cosigner, SELF Refi has a maximum DTI of 60%.
Unfortunately, many lenders don’t publish their DTI requirements, making it more difficult for potential borrowers to know ahead of time if they’ll qualify. However, it’s a good idea to calculate your DTI to determine your current ratio. If it’s higher than 50%, reducing your DTI or applying with a cosigner can increase your chances of qualifying for a student loan refinance.
Check Out: Credit Score Needed for Federal & Private Student Loans
How can you improve your DTI to qualify for refinancing?
Since many lenders aren’t transparent about their DTI requirements, the best thing potential borrowers can do is lower their DTI as much as possible before applying for a student loan refinance. You can follow these steps to improve your DTI:
- Pay off credit cards: Credit card debt is usually expensive and should be paid off every month in full. If you pay off your cards, your credit report will show a $0 minimum monthly payment when your credit report updates.
- Pay off other loans: Paying off a car or mortgage is a lot harder than a credit card in most situations, but if you have the cash to pay off a loan, your DTI will go down.
- Get a raise at work: Increasing your income will automatically decrease your DTI. While it may be easier said than done, asking for a raise after you’ve been at the same job for a while and have gotten good reviews from your boss can be a relatively quick way to lower your DTI.
- Find a better paying job: Again, this one isn’t always easy. But if you’ve been in your position for a couple of years and don’t see a promotion on the horizon, maybe a higher paying job at a new company is in your future.
- Start a side hustle: If your job and schedule allow, adding an evening or weekend side hustle can quickly add to your income and lower your DTI. Many hobbies could easily translate into a small, part-time business.
Wherever you are in your financial journey, don’t lose track of your DTI. It is a good measure of your financial health, so even if you aren’t worried about your student loan refinancing debt-to-income ratio today, it could come in handy in the future.
By visiting Credible, you can learn more about student loan refinancing and compare rates from multiple private student loan lenders.
How does student loan refinancing affect your overall DTI?
Just like a car payment or personal loan, student loan payments are part of your DTI. Depending on how you refinance your loans, your DTI could go up or down:
- If you refinance and end up with a higher monthly payment, your DTI will go up. While that may be problematic for future loans, it isn’t always a bad thing in the long-run. Sometimes a higher monthly payment means you’ll pay off the loan faster and save on interest. That’s an overall financial win.
- If you refinance with lower monthly payments, your DTI will go down after refinancing. A lower monthly payment could mean it takes longer to pay back your student loans and more total interest you could end up paying.
Although you shouldn’t make a refinancing decision purely because of a change in DTI, it’s a factor that should be considered.
Learn More: When to Refinance Your Student Loans
How does debt-to-income ratio affect a lender’s decision?
DTI is only one part of a lender’s decision process for offering a student loan refinance. Other eligibility requirements include:
- Your credit score and history: A borrower with a good credit score may still qualify for a loan even if they have a high DTI.
- Verifiable income: Some lenders have a minimum income requirement, but all will need to see proof of your income for you to be eligible for a student loan refinance.
- Loan information: To be eligible for student loan refinancing, you’ll generally need to provide the lender with information such as loan balances, your current lenders, and what schools you attended for each of your current student loans.
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Eric Rosenberg has contributed to the reporting of this article.
