Refinancing your student loans has the potential to reduce your interest rate and save you money on your debt. However, you’ll need to meet the lender’s requirements for credit, income, and debt-to-income ratio (DTI) to qualify.
Your debt-to-income ratio compares your monthly debt payments with your income. Lenders look at your DTI to make sure you’re not already overextended with debt and can afford to repay your new loan.
A high DTI can make it difficult to qualify for student loan refinancing, while a low DTI may boost your chances of approval.
What is your debt-to-income ratio?
Your debt-to-income ratio compares your recurring monthly debt payments with your monthly gross, or pre-tax, income. If you pay $1,500 toward debts every month and have a gross income of $4,000, for example, your DTI would be 37.5%.
Lenders look at your DTI to see if you have enough room in your budget to pay back refinanced student loans. They don’t want to lend to someone who can’t afford to make monthly payments.
“[DTI] shows whether the borrower is stretched thin,” explained Mark Kantrowitz, a financial aid expert as well as publisher and vice president of research at SavingforCollege.com.
If your DTI is high, the lender views you as a risky candidate for a loan and may reject your application. If your DTI is low, on the other hand, the lender could be reassured that you have the means to pay back your new loan on time.
Are student loans included in your DTI?
Your DTI considers all your recurring monthly debt payments, including your existing student loans. Student loans can be a major monthly bill — in fact, the average monthly student loan payment is $200 to $299, according to the most recent data from the Federal Reserve.
Considering their potentially significant impact on your budget, student loan bills are included when calculating your DTI. If you need to lower your DTI, reducing your student loan payments, whether through refinancing, an income-driven repayment plan, or another option, can help.
| Tip: Most federal student loan payments have been paused since 2020 due to the COVID-19 pandemic. While this measure’s expiration date has been extended several times, payments are expected to resume by the end of 2023. But even if your payments are paused, your student loans may still be included in your DTI. Check with the refinancing lender to see how it views student loans that have been paused. |
What DTI is required to refinance student loans?
There’s no standard DTI maximum among student loan refinancing providers, but most want to see a ratio below 50%. Here are some general standards to consider:
- Under 36%: This is what lenders prefer, as it indicates that your debt is manageable and you have money left over after paying your bills.
- 36% to 49%: While you’re able to pay your bills, you might have trouble covering an emergency expense. If you fall in this range, look for ways to lower your DTI.
- 50% or more: Your budget is stretched tight, and it’s a good idea to look for ways to improve your DTI. A DTI of 50% or higher could make it difficult to qualify for student loan refinancing and other types of borrowing.
Most lenders don’t publicly disclose their maximum DTI requirements — plus, your approval for a loan also depends on many other factors. For example, the lender may allow a higher DTI for someone with excellent credit. Those with average or poor credit may need to show a lower DTI to be approved for the same loan.
If you’re concerned about your approval odds, see if you can prequalify before submitting an application, or ask the specific lender you’re considering what its requirements are.
Related: Learn more about refinancing your student loans
How to calculate your DTI
To calculate your DTI, add up your monthly debt payments and divide that sum by your gross monthly income. Some examples of debt payments you should include are:
- Student loans
- Credit cards
- Car loans
- Mortgage or rent
- Personal loans
- Child support or alimony payments
Once you’ve added up that amount, divide it by your monthly pre-tax income and multiply it by 100 to get a percentage. For example, let’s say your debt payments add up to $2,000, and your monthly income is $4,500.
$2,000 / $4,500 = 0.44 x 100 = 44%
Be sure to include all your debt payments to get the most accurate DTI.
How to lower your DTI
A high DTI can limit your borrowing options and make it difficult to save from month to month. If you want to lower your DTI and refinance your student loans, these steps can help:
- Pay down debts. Reducing your monthly debt obligations is one way to lower your DTI. If you can afford to make extra payments, you’ll pay off your loans faster and save money on interest. Consider targeting the debts with the highest interest rates to maximize your savings.
- Increase your income. Another way to lower your DTI is to earn more money. Working toward a promotion at work, applying for a new job, or starting a side hustle are all ways you could increase your monthly income and reduce your DTI as a result.
- Refinance your loans. Refinancing your existing loans, such as your student debt or car loans, has the potential to reduce your monthly payments and lower your DTI, too. Of course, it’s difficult to qualify for refinancing if your DTI exceeds a lender’s requirements.
- Apply for income-driven repayment. Enrolling in an income-driven plan could decrease your monthly student loan payments — and your DTI along with them. Note that only federal student loans are eligible for income-driven repayment; private student loans don’t qualify.
If a high DTI is making it difficult to refinance your student loans, there may be a workaround. Applying with a creditworthy cosigner who has a low DTI could boost your chances of approval.
“It gives the lender two fish on the hook, not just one,” said Kantrowitz, the financial aid expert. Because you’re sharing the debt with someone else, the lender should be more willing to approve you.
Keep in mind that your cosigner will share responsibility for your loan and is expected to make payments if you fall behind. If your cosigner is comfortable with that, applying together could potentially help you qualify and access better interest rates.
Related: Learn more about refinancing your student loans