# How to Calculate Debt-to-Income Ratio in 2024 for Student Loans

Your debt-to-income ratio (DTI) is one of the factors lenders consider when making decisions about whether to approve a student loan or how much you can borrow. This ratio is calculated by dividing the amount you pay on regular debts, including your student loan payments, by your gross monthly income.

### Key learning points

• Your debt-to-income ratio (DTI) is the portion of your monthly debt payments divided by your gross monthly income.
• A higher DTI ratio indicates that you as a borrower are at greater risk. A DTI ratio that is too high in the eyes of lenders can make it more difficult to qualify for different loans.
• Lenders generally like to see a DTI ratio of less than 43% because these borrowers have lower default rates.

## Introduction to the debt-to-income ratio

A debt -to-income ratio (DTI) is a factor used to describe how much debt a consumer has compared to their income. It is usually expressed as a percentage. Lenders use this factor to assess your ability to manage your total monthly payments and whether you can reliably repay the money you plan to borrow.

A higher DTI ratio shows that you have a lot of debt to manage each month compared to the amount you earn, which tells lenders that you are a high-risk borrower. The Consumer Financial Protection Bureau (CFPB) recommends a DTI ratio of 36% or less if you plan to apply for a mortgage. However, it is noted that some mortgage lenders will approve borrowers with DTIs of 43% or higher, including the monthly home payment.

## How to Calculate Debt to Income Ratio

To calculate your DTI ratio, add up all the monthly debts you owe and divide the total of those debts by your gross monthly income. The result of this calculation is a decimal number, which you multiply by 100 to convert the number to a percentage.

### Identify monthly debts

Monthly bills that count toward your DTI ratio calculation include regular bills and other payments you need to make. This means that the required monthly expenses count towards the DTI, while the discretionary purchases you make each month do not count towards you.

Bills that can count towards DTI each month include:

• Student grants
• Credit card payments
• Car loans
• Personal loans
• Mortgage payments (including homeowner’s insurance, property taxes, and homeowners’ association (HOA) dues)

### Calculation of gross monthly income

To calculate your DTI, you must also determine your gross monthly income. Keep in mind that this factor includes all the money you earn each month before taxes and other deductions are deducted from your pay.

Funds that can count towards gross monthly income include:

• Tips
• W-2 wages
• Income as a self-employed person
• Investment returns
• Child benefits
• Alimony
• Social security wages

### Step-by-step guide to calculating debt-to-income ratio with student loans

Complete the following steps to calculate your DTI ratio:

• Step 2: Determine your gross monthly income.
• Step 3: Divide your monthly debts by your gross monthly income.
• Step 4: Multiply the number you get by 100.

Consider this example: Imagine you currently make \$7,000 a month and you would have \$3,800 in monthly debt payments when you add in the new payment on a house you want to buy, plus other bills and expenses. In that scenario, you calculate your DTI using the following calculation:

3,800 / 7,000 = 0.54285 * 100 = 54.285%

This means that your DTI ratio would be only slightly above 54%, which is higher than most mortgage lenders would accept.

However, if you find a more affordable home to purchase that would result in monthly debt payments of \$2,800, the DTI calculation drops to a more acceptable range of 40%:

\$2,800 / \$7,000 = 0.4 * 100 = 40%

## Interpret the debt-to-income ratio result

Ideally, you want to keep your DTI below 36%, although some mortgage lenders will approve borrowers with a DTI of 43% or higher. Anyway, here’s an overview of the different debt-to-income ratio ranges and what each means: