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Do Student Loans Affect Debt-to-Income Ratio?
by
JG Wentworth
•
September 16, 2024
•
6 min
With the school year underway, it’s time to answer a common question many students have: can their loans affect their debt-to-income (DTI) ratio? This important metric can impact everything from your ability to get approved for a mortgage to the interest rates you qualify for on future loans. And when it comes to student debt, it’s a particularly tricky calculation.
In this article we’ll explore how student loans affect your DTI, why it matters, and what you can do to manage this ratio and keep your finances on track – both now and in the future.
What is debt-to-income ratio?
Let’s start with the basics. Your DTI is a calculation that measures how much of your gross monthly income (that’s your total income before taxes and other deductions) goes towards paying your monthly debt payments.
DTI is calculated by taking your total monthly debt payments and dividing them by your gross monthly income. The result is a percentage that lenders use to evaluate your creditworthiness and ability to take on new debt.
For example, let’s say your gross monthly income is $5,000 and your total monthly debt payments (including student loans, car loans, credit cards, etc.) add up to $1,500. Your DTI ratio would be 30% ($1,500 / $5,000 = 0.30).
Why does DTI matter?
Your DTI ratio is one of the key factors that lenders consider when you apply for a loan, whether it’s a mortgage, auto loan, or even a credit card. Lenders use it to gauge the risk of lending to you: the higher your DTI, the more of your monthly income is already committed to debt payments, leaving less room for additional obligations.
Generally speaking, the lower your DTI, the better. Most lenders prefer to see a DTI ratio of 43% or less, though the exact requirements can vary. A high DTI can make it more difficult to get approved for new credit or result in less favorable terms, like higher interest rates.
But it’s not just lenders who care about your DTI – it’s also an important metric for your own financial health and planning. Keeping your debt payments manageable in relation to your income can help ensure you have enough money left over each month for other expenses, savings, and achieving your financial goals.
How do student loans affect DTI ratio?
Now, let’s talk about how student loans factor into all of this. Student debt can have a significant impact on your DTI ratio for a few key reasons:
- High loan balances: The average graduate leaves college with around $29,000 in student loan debt. That’s a hefty monthly payment that can really drive up your DTI, especially if you’re just starting out in your career with a lower income.
- Extended repayment timelines: Unlike shorter-term debts like auto loans or credit cards, student loans typically have repayment periods of 10 years or more. That means those monthly payments will be factored into your DTI for a very long time.
- Income-driven repayment plans: While these plans can make student loan payments more manageable in the short-term, they can also result in a higher DTI ratio since the payments are calculated based on your income, not the full loan balance.
- Deferred or postponed payments: If you’ve taken advantage of deferment, forbearance, or an extended grace period on your student loans, those suspended payments won’t be factored into your current DTI. But as soon as you resume payments, your ratio will take a hit.
Student loans, with their typically high balances and long repayment timelines, can be a major drag on your DTI ratio, especially in the years immediately following graduation. This can create significant challenges when it comes to qualifying for other types of financing.
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How to manage student loans and your DTI
Fortunately, there are steps you can take to keep your student debt from torpedoing your debt-to-income ratio:
- Prioritize higher-income careers: When deciding on a college major and future career path, consider the potential impact on your future earnings. Higher-paying jobs make it easier to maintain a healthy DTI, even with significant student loan balances.
- Explore income-driven repayment: While these plans can raise your DTI in the short-term, they may be worth it to keep your monthly payments affordable, especially early in your career when your income is lower.
- Make extra payments when possible: Paying even a little extra each month can help you chip away at your student loan balance faster, reducing the overall impact on your DTI.
- Refinance for a lower interest rate: Securing a lower rate through refinancing can lower your monthly payments without extending your repayment timeline, helping improve your ratio.
- Delay major purchases: If you’re planning a big purchase like a house or car, you may want to focus on paying down student loans first to get your DTI in a better position.
- Monitor your DTI regularly: Make a habit of calculating your debt-to-income ratio periodically so you can spot any problem areas and make adjustments as needed.
The bottom line
Your debt-to-income ratio is a critical financial metric that can have far-reaching implications, from getting approved for a mortgage to qualifying for the best interest rates. And when it comes to student loans, managing this ratio takes careful planning and strategic decision-making.
By understanding how student debt affects your DTI, taking proactive steps to keep it in a healthy range, and making informed choices about your financial future, you can position yourself for greater financial success – both now and down the road. It may take some work, but your wallet (and credit score) will thank you in the long run.
There’s always JG Wentworth…
Are you struggling with debt that’s interfering with your ability to pay off your student loans? JG Wentworth might be able to help. If you have $10,000 or more in unsecured debt, there’s a good chance you’ll qualify for our Debt Relief Program.* Some of our program perks include:
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- 24/7 support
- We only get paid when we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?
Please note that public student loans are not eligible for this program.
SOURCES CITED
Safier, R., “Student loan debt: Averages and other statistics in 2024.” USA Today.
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