How student loans affect your debt-to-income ratio

Student loans and debt-to-income ratio both affect your ability to borrow money. (iStock)

Student loan debt can affect your ability to qualify for personal loans, car loans and even a mortgage. That's because lenders weigh student loans and debt-to-income ratio for approval decisions. Here's more on what debt-to-income ratio means and why it matters for borrowing money.

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What is debt-to-income ratio?

Debt-to-income ratio (or DTI) is a measure of how much of your income goes toward debt repayment each month. To calculate yours, you'd simply divide your monthly debt payments by your monthly gross income.

In other words, it's how much of your money is paying for previous spending instead of being used for your current spending, said Ashley Norwood, regional manager northeast, AccessLex Center for Education and Financial Capability.


For example, if your monthly gross income is $5,000 and $1,000 of that goes toward debt each month, your DTI ratio would be 20 percent. An ideal debt-to-income ratio for a mortgage, personal loans or other loans is typically 36 percent or less. Anything more suggests to lenders that you might be overextended financially.

Keep in mind that debt-to-income ratio only measures debt repayment. Other monthly expenses, such as utilities, insurance, food and transportation, aren't factored into the equation.

What is an acceptable debt-to-income ratio?

Pinpointing an acceptable debt-to-income ratio typically depends on what type of loan you're applying for.

With a mortgage, for example, the sweet spot is a DTI ratio between 28 percent and 36 percent, though it's possible to get a qualified mortgage with a debt-to-income ratio as high as 43 percent. For car loans and personal loans, you may be able to qualify with a ratio in the 40 percent range.

The acceptable limit can also be higher for refinancing student loans. For example, you may qualify for refinancing even when as much as 50 percent of your income goes toward repaying student loan debt.

Generally, however, anything over 40 percent is a sign that debt is eating up a sizable chunk of your income. On the other hand, anything below 20 percent sends the signal that you've got your debt well under control.

How do student loans affect your debt-to-income ratio?

Student loan debt can have a direct effect on your debt-to-income ratio, in that the higher your monthly payments the more your ratio can increase.

Say you took out $100,000 in loans to pay for your undergraduate and graduate degrees, for instance. Your monthly payments on those loans total $1,500 while you're currently making a starting salary of $50,000. Assuming a gross monthly income of $4,166, your debt-to-income ratio would be 36 percent.

In that scenario, you'd be right on the edge of what's acceptable for a mortgage. If your income were to drop even slightly, that could bump your DTI ratio up a few points, potentially making it more difficult to qualify for a home loan, personal loans or a refinance loan. Adding to your debt can also be problematic.


"If a new debt will push you over that 36 percent threshold, it’s probably smart to hold off on any more debt until you can lower or eliminate some of those payments," said Norwood.

Keep in mind also that your spouse's debt-to-income ratio can also come into play when applying for a mortgage or any other loan if you're co-borrowers. Even if you don't have much debt, your combined DTI ratio could still put a loan out of reach if your spouse is carrying a large amount of student loan debt.

How to lower your debt-to-income ratio

If your student loans and debt-to-income ratio are an obstacle to getting a mortgage or any other type of loan, there are a few things you can do to improve it. That includes:

  • Considering an income-driven repayment plan for federal student loans.
  • Eliminating smaller debts, such as credit cards or personal loans. 
  • Increasing your gross monthly income by taking on more hours at work, angling for a raise, getting a part-time job or starting a side hustle. 

"It’s actually a simple solution, but sometimes the solution is easier said than done," said Norwood. The more creatively you can think about ways to eliminate debt or increase income, the greater the odds of successfully lowering your debt-to-income ratio.

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