How Are Student Loans Calculated Into Dti

Last Updated on December 28, 2022

How Are Student Loans Calculated Into Dti

Student loans are considered to be one of the most important investments that students can make. It could help them get a degree, which would help them to find better jobs. However, the cost of education is increasing every year and it has become very expensive for students to go to school. This is why they need to make sure they have enough money saved up before they start their studies at school. Students also need to consider how much debt they have when they graduate from college or university because this can affect their credit score in the long run.

Understanding DTI and how it impacts your chances of getting a loan or  credit card - Mid-Hudson Valley Federal Credit Union

How Are Student Loans Calculated Into Dti

Lenders determine debt-to-income ratio, or DTI, by dividing your total monthly debt payments and other financial obligations by your gross monthly income. Generally, you’ll need a DTI below 50% to be able to refinance student loans. The lower your DTI, the better your chances of qualifying and getting a low interest rate.

Are student loans counted in your debt-to-income ratio?

Lenders typically count your existing student loan payment in your debt-to-income ratio. They’ll also include your housing payment — even if you rent — as well as other debt payments and obligations such as child support.

Use the calculator below to estimate your debt-to-income ratio. Depending on your DTI, consider applying for student loan refinancing pre-qualification to see if you’ll meet a lender’s other eligibility criteria. Prequalifying won’t hurt your credit and will give you an estimated personalized interest rate.https://embeds.nerdwallet.com/cff/?form_id=945&nwaMode=embed

Can you refinance with a high debt-to-income ratio?

If your debt-to-income ratio is high, you may be able to refinance student loans by increasing your income, paying down debt or both. If those options aren’t possible, refinancing with a co-signer may also help you meet the lender’s requirements.

A high debt-to-income ratio means a lot of your income goes toward bills. The Federal Reserve considers a DTI of 40% or more a sign of financial stress. A low debt-to-income ratio — 20% or less — means you have wiggle room in your budget.

Refinancing student loans can actually decrease your debt-to-income ratio by lowering your monthly student loan payment. This may be helpful, for example, if you want to get a mortgage to buy a home.

If you can’t qualify with a student loan refinance lender because of your DTI, consider other options like enrolling in an income-driven repayment plan. That may offer you a more affordable monthly bill.

Debt-to-income ratio requirements

You’ll need to meet a lender’s DTI requirements to refinance student loans. DTI criteria often isn’t shared publicly, but the following lenders provide this information:

LenderMaximum debt-to-income ratio
Splash Financial35%-50% depending on the borrower’s income, degree type and loan amount.
Education Loan Finance55%
RISLA50%
PenFed35%-50% depending on the borrower’s income, degree type and loan amount.
U-fi45%
LendKey50%
PNC65%

Student loan refinance lenders assess your DTI to understand how much extra cash you have each month, but it’s not their only consideration. Factors like your credit history and scores, employment status and savings are also important in qualifying you for student loan refinancing,

About the author: Ryan Lane is an assistant assigning editor for NerdWallet whose work has been featured by The Associated Press, U.S. News & World Report and USA Today. 

how to lower debt to income ratio with student loans

If your DTI is too high to qualify for a loan, read below for some strategies to decrease the ratio:

Pay Off Smallest Individual Loans

The simplest way to reduce your DTI quickly is to pay off small individual loan balances. For example, you have an auto loan with a $300 monthly payment and a $2,000 balance. You also have student loans with a $350 monthly payment and a $20,000 balance. You earn $40,000 a year, so your current DTI is 19.5%.

Instead of throwing extra money toward your student loans, add any extra money to your auto loan until you can pay it off. If you do that, your DTI will drop to 10.5%. 

Reduce Credit Card Interest

If you have credit card debt, you likely have a high-interest rate. This can make paying down the balance difficult. If possible, try to transfer your credit card debt to a new card with a 0% APR balance transfer offer. 

Most balance transfer offers last between 12 and 20 months. You won’t be charged any interest during that time, and all your payments will go toward the principal. Reducing the credit card balance will also reduce your monthly payment and your DTI.

If you don’t qualify for a 0% APR offer, call your credit card provider and ask them to lower the interest rate on your card. Remind them that you’ve been a loyal customer and that you’ve always paid on time. Try this strategy for all your credit cards to decrease your DTI. 

Increase Your Income

Paying off debt is difficult, but increasing your income can make the process easier. It can also reduce your DTI. When you increase your income, your DTI will automatically decrease. And if you use the extra money to pay off your debt faster, that will also reduce your DTI. 

Start by asking for a raise at work. Prove your value to the company by creating a list of ways you’ve saved your employer money or increased the company’s revenue. 

If a raise isn’t possible or you’ve already received one recently, think about starting a side hustle. Side hustle income can count as part of your total income for DTI. Plus, you can put the extra money toward your debts.

Take Fewer Deductions

If you’re self-employed, your DTI is based on your post-tax or net income, not your pre-tax or gross income. And because many self-employed individuals take a lot of business deductions to reduce their tax burden, they often wind up with a low taxable income.

If you’re planning on buying a house soon, consider taking fewer deductions to increase your net income. This may result in a higher tax burden, but it can make qualifying for a mortgage easier.

Refinance Your Loans

Refinancing your loans to reduce your monthly payment can greatly impact your DTI. For example, you owe $30,000 in student loans with a 10% interest rate and a 10-year term. Your monthly payment is $396.45. Your annual income is $50,000, which means your current DTI is 9.5%.

If you refinance to a 5% interest rate and a 10-year term, your new monthly payment will be $318.20. This means your new DTI will be 7.6%.

If you want to reduce your DTI further, you can refinance to a longer repayment term. Longer repayment terms have lower monthly payments than shorter repayment terms, resulting in a lower DTI. For example, if you refinance to a 15-year term and a 5% interest rate, your new monthly payment will be $237.24. This would reduce your DTI to 5.7%.

The only downside of refinancing to a longer-term is that you might end up paying more in total interest over the life of the loan than if you refinanced to a shorter term. However, you can always pay extra on your loan and avoid the extra interest while lowering your DTI. 

About the author

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