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.
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.
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. |
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:
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
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:
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.
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:
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