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 1: Add up all your monthly bill payments.
  • 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:

Debt-to-income ratio (DTI) Judgement What it means
0% to 35% Very good Lenders consider the lowest DTIs as an indicator that borrowers are paying their bills and meeting loan requirements.
36% to 43% Good Borrowers with a DTI in this range can typically get approved for a mortgage if they meet other loan requirements.
44% to 50% Acceptable to some lenders Some lenders will approve home loans for applicants with DTIs in this range, but options may be more limited.
50% or higher High risk Borrowers with a DTI of more than 50% are unlikely to be approved for home loans and may have difficulty qualifying for other forms of financing.

Strategies for Improving Student Loan Debt-to-Income Ratio

If your DTI ratio is too high due to your current student debt and monthly payments, there are some steps you can take to lower it. Consider the following strategies specific to your student loans.

Refinance your student loans

If your student loans have a high monthly payment that makes your DTI higher than it could be, you may want to consider refinancing or consolidating your loans to increase your monthly payment amount.

Remember, there are downsides to refinancing federal student loans with a private lender, including the loss of federal protections such as forbearance and forbearance.

Choose a different payment plan

If you have federal student loans, you can also review the available repayment plans and choose a better option. This step can be especially helpful for your DTI if you have a large student loan payment under the standard 10-year repayment plan.

For example, by choosing an extended repayment plan for federal loans, you can defer payments for up to 25 years while securing a lower monthly payment.

Look into income-driven repayment plans

There are also income-driven repayment (IDR) plans for federal student loans that base your monthly payment on your income and family size. For many people whose incomes are on the low side, switching to an IDR plan could mean owing $0 in student loans every month.

The new Saving on a Valuable Education (SAVE) Plan offers a higher income exemption for student loan payments than other IDR plans. According to the U.S. Department of Education, singles with an income of $32,800 under this plan have a discretionary income of $0, so they are eligible for a $0 monthly payment.

Your discretionary income is also € 0 if you are part of a family of four with an annual income of € 67,500 or less.

How does the debt-to-income ratio affect loan eligibility?

If you have a high DTI ratio, you may seem like a risky bet to lenders. For this reason, the Consumer Financial Protection Bureau (CFPB) recommends keeping your DTI below 36%.

Are there strategies to improve the debt-to-income ratio with student loans?

Borrowers with student loans can lower their DTI ratio by transferring their student loans to a new payment plan or by refinancing. In either case, they will only improve their DTI if the move makes them eligible for a lower monthly payment than what they are currently paying.

How does the debt-to-income ratio affect financial decisions?

A DTI ratio is used by lenders when deciding whether to approve someone for a loan. This means that having a high DTI can make it more difficult to qualify for a mortgage and other forms of financing, while a low DTI can increase your chances of approval.

It comes down to

A DTI ratio is an important factor when it comes to important credit decisions, but it is not the only one. You’ll also want to keep your credit score in good shape and maintain steady employment if you want to qualify for a mortgage and other types of loans with the best rates and terms.

If your current DTI is hurting you financially, you also have several options available to you to manage your student loans. Consider refinancing or choosing a new repayment plan that leads to a lower monthly payment and therefore lowers your DTI.

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