Student Loan Refinance Debt to Income Ratio – Forbes Advisor
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Student loan refinance can be an effective way to manage your debt. If you can get a lower interest rate, you could save thousands and pay off your debt faster. However, not all will qualify.
If your debt-to-income ratio (DTI) — a number that reflects the amount of your income used to pay off your debt each month — is too high, lenders will see you as a greater risk. A high DTI indicates that you may have overextended yourself and may be having trouble making your payments in the future.
However, some refinance providers have less stringent DTI requirements than others, and there are ways to lower your DTI before submitting your refinance application.
What is a debt to income ratio?
Your debt-to-income ratio is a factor that creditors consider when deciding whether or not to approve a loan or credit card. Your DTI is the amount of your total monthly debt obligations divided by your gross income – how much you earn before taxes and other deductions are deducted.
Lenders look at your DTI to see if you can comfortably afford your payments with a new account. If your DTI is too high, it could indicate that you are overdemanding your paycheck and may not be able to afford all of your payments in the future.
How do student loans affect DTI?
Whether you are applying for a mortgage or looking to refinance your student loan debt, your current student loan payments are included in the DTI formula.
To create your DTI, lenders review the accounts and monthly payment amounts listed on your credit report. You can calculate your own DTI by checking your credit reports for free at AnnualCreditReport.com.
Let’s say you make $5,000 per month and have the following required payments:
- Credit card: $100
- private loan: $250
- car loan: $250
- Federal student loan: $300
- Private Student Loan 1: $200
- Private student loan 2: $250
In total, you deposit $1,350 for your debt and credit accounts. Divide that number by your monthly income – $5,000 – and you get 0.27. Multiply that by 100 to turn it into a percentage and you’ll find that your DTI is 27%.
What DTI is required to refinance student loans?
Student loan refinance loans are issued by private lenders, so there is no DTI that all lenders use to the maximum. They all have their own borrower eligibility requirements in terms of credit score, income, and DTI limits. In general, the lower your DTI, the better.
While requirements vary by lender, these general guidelines can give you an idea of where you stand:
- DTI of 35% or less: Your DTI indicates that your debt is at a manageable level relative to your income, so you should be able to comfortably afford your payments. Most student loan refinance lenders are happy to work with applicants with a DTI at this level, as long as they meet the lender’s other criteria.
- DTI from 36% to 49%: If your DTI is in this range, you’re probably managing your debt, but you may not have much room to maneuver in your budget. Most student loan refinance lenders still work with borrowers in this space, but you may need a co-signer if your credit history or income is not good enough.
- DTI of 50% or higher: If your DTI is 50% or more, most of your income goes into debt. This fact can make lenders suspicious, as an unexpected emergency or other major expense could cause you to miss payments. There are some student loan refinance lenders that work with borrowers at this level, but you’ll likely have fewer options.
For many lenders, their eligibility criteria are proprietary and they do not disclose their maximum DTI. From the lenders who shared their requirements, we found that the maximum DTI for student loan refinancing ranged from 40% to 60%.
How to improve your DTI before refinancing
If your DTI is too high for most student loan refinance lenders, consider these tips to lower it before you apply.
1. Sign up for an income-based reimbursement (IDR) plan
If you have federal student loans, you can use income-tested repayment plans to lower your payments and improve your DTI. With an IDR plan, your new payment is fixed with a longer repayment term — 20 to 25 years — and a percentage of your discretionary income calculated based on your family size and income.
You can significantly reduce your monthly payments with an IDR plan, and lenders will look at the new payment as it appears on your credit report to calculate your DTI. Although this strategy can help lower your DTI, remember that once you refinance your federal student loans, you will no longer be eligible for federal benefits like IDR plans and will have fewer opportunities to defer or forgive your loans.
2. Pay off some of your debt
You may have other forms of debt besides student loans, such as B. Auto loans, credit card balances, or medical debt. If that’s the case, you can improve your DTI by cashing out the account with the lowest balance. Paying off this debt will reduce your overall debt and eliminate a monthly payment, improving your DTI.
Alternatively, you could also pay off the debt with the largest monthly payment. This will have the biggest impact on reducing your DTI because you’re getting rid of your largest monthly debt burden.
3. Increase your income
If possible, you can lower your DTI by increasing your income. Whether you’re getting a raise from work, getting a raise from a job change, or taking on a second job or sideline, lenders consider consistent sources of income in their DTI calculations.
Let’s say you make $3,000 a month and have the following monthly payment obligations:
- Credit card: $200
- car loan: $350
- student loans: $600
In total, you have $1,150 in monthly commitments. Divide that amount by your income – $3,000 – and you have a DTI of 38%.
If you were a part-time grocery deliverer and made an extra $500 a month, your total income would jump to $3,500 and your DTI would drop to just 32.8% — a significant improvement.
Tip: If you have a higher DTI and cannot qualify for a student loan refinance on your own, look for a lender that allows you to apply with a co-signer. A co-signer is someone with good credit and a reliable income and can be a parent, relative, significant other or trusted friend. If your co-signer has an established credit history, steady income, and low DTI, they can help you qualify for a loan and get a better interest rate.
How to find out if you qualify for student loan refinance
Student loan lenders review applicants’ DTIs as part of the application process. However, the maximum allowable DTI varies by lender, so it’s a good idea to shop around and compare offers from multiple refinance lenders to see if you qualify and to compare interest rates.
Many leading student loan refinance lenders have pre-qualification tools that allow you to verify your eligibility for a loan and view interest rates and possible loan options without affecting your credit. By using prequalification tools, you can see if a lender will accept your DTI as is, or if you need to improve it before you can get a loan.