Your debt-to-income (DTI) ratio is one of the factors lenders consider when making decisions about whether to approve you for a student loan or how much you can borrow. This ratio is calculated by dividing how much you pay in regular debt payments, including your student loan payments, by your gross monthly income.
Key Takeaways
- Your debt-to-income (DTI) ratio is the proportion of your monthly debt payments divided by your gross monthly income.
- A higher DTI ratio indicates that you are a greater risk as a borrower. A DTI ratio that's too high in the eyes of lenders can make it more difficult to qualify for various loans.
- Lenders generally like to see a DTI ratio under 43%, as those borrowers have lower default rates.
Introduction to Debt-to-Income Ratio
A debt-to-income (DTI) ratio is a factor used to describe how much debt a consumer has compared to their income. It’s usually expressed as a percentage. Lenders use this factor to assess your ability to manage your total monthly payments and whether you could 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 how much you earn, which tells lenders you are a high-risk borrower. The Consumer Financial Protection Bureau (CFPB) recommends maintaining a DTI ratio of 36% or less if you plan to apply for a mortgage. However, it's noted that some mortgage lenders will approve borrowers with DTIs of 43% or higher, including the monthly housing payment.
How to Calculate Debt-to-Income Ratio
To figure out your DTI ratio, you'll add up all the monthly debt payments 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'll multiply by 100 to turn the number into a percentage.
Identifying Monthly Debts
Monthly bills that count for the purpose of calculating your DTI ratio include regular bills and other payments you have to make. This means that required monthly expenses count toward DTI, while discretionary purchases you make each month don't count against you.
Bills that can count toward DTI each month include:
- Student loans
- Credit card payments
- Car loans
- Personal loans
- Mortgage payments (including homeowner’s insurance, property taxes, and homeowner association (HOA) dues)
Calculation of Gross Monthly Income
You'll also need to determine your gross monthly income to calculate your DTI. Keep in mind that this factor includes all the money you earn each month before taxes and other deductions are taken from your pay.
Funds that can count toward gross monthly income include:
- Tips
- W-2 wages
- Self-employment income
- Investment income
- Child support
- Alimony
- Social Security wages
Step-by-Step Guide to Calculating Debt-to-Income Ratio With Student Loans
Take 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 owed by your gross monthly income.
- Step 4: Multiply the number you get by 100.
Consider this example: Imagine you currently earn $7,000 per month and that you would have $3,800 in monthly debt payments to make if you included the new payment on a home you want to buy, plus other bills and expenses. In that scenario, you would determine your DTI with the following calculation:
3,800 / 7,000 = 0.54285 * 100 = 54.285%
This means your DTI ratio would be just a smidge over 54%, which is higher than most mortgage lenders would accept.
However, if you found 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%
Interpreting the Debt-to-Income Ratio Result
Ideally, you want to keep your DTI below 36% even though some mortgage lenders will approve borrowers with a DTI of 43% or higher. Either way, here's a rundown of different debt-to-income ratio ranges and what each one means:
| Debt-to-Income Ratio (DTI) | Rating | What It Means |
| 0% to 35% | Very good | Lenders consider the lowest DTIs to be an indicator that borrowers pay their bills and satisfy 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 for 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 over 50% are unlikely to be approved for home loans and may struggle to qualify for other types of financing. |
Strategies for Improving Debt-to-Income Ratio With Student Loans
If your DTI ratio is too high because of your current student loan debt and monthly payments, there are some steps you can take to lower it. Consider the following strategies specifically for your student loans.
Refinance Your Student Loans
If your student loans have a high monthly payment that is causing your DTI to be higher than it could be, you can consider refinancing or consolidating your loans to switch up your monthly payment amount.
Just remember that there are downsides that come with refinancing federal student loans with a private lender, including the loss of federal protections like deferment and forbearance.
Choose a Different Payment Plan
If you have federal student loans, you can also look at the available repayment plans and choose a better option. This move can be especially helpful for your DTI if you have a high student loan payment on the standard 10-year repayment plan.
By opting for an extended repayment plan for federal loans, for example, you can stretch out payments for up to 25 years and secure a lower monthly payment in the process.
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 lower end, moving to an IDR plan can mean owing $0 toward student loans each month.
The Saving on a Valuable Education (SAVE) Plan features a higher income exemption for student loan payments than other Income-Driven Repayment plan (IDR) plans. According to the U.S. Department of Education, single people with an income of $32,800 or less have a discretionary income of $0 under this plan, thus they qualify for a $0 monthly payment. For a family of four with an annual income of $67,500 or less, your income will also be $0 under the plan.
On July 18, 2024, a federal court blocked the operation of the Saving on a Valuable Education (SAVE) Plan until court cases centered around the income-driven repayment (IDR) plan can be resolved. In the meantime, the Department of Education has moved borrowers enrolled in the SAVE plan into forbearance, whereby they will not need to make payments, nor will interest accrue on their loans.
For those nearing Public Service Loan Forgiveness (PSLF)—you can either "buy back" months of PSLF credit if you reach 120 months of payments while in forbearance or switch to a different IDR plan.
How Does the Debt-to-Income Ratio Affect Loan Eligibility?
Having a high DTI ratio can make you seem like a risky bet to lenders. For this reason, the Consumer Financial Protection Bureau (CFPB) recommends keeping your DTI below 36%.
Are There any Strategies for Improving the Debt-to-Income Ratio With Student Loans?
Borrowers with student loans can decrease their DTI ratio by moving their student loans to a new payment plan or refinancing. In either case, they will only improve their DTI if the move qualifies them for a lower monthly payment than what they're currently paying.
How Does the Debt-to-Income Ratio Impact Financial Decisions?
A DTI ratio is used by lenders when deciding whether to approve someone for a loan. This means having a high DTI can make it more difficult to qualify for a mortgage and other types of financing, whereas a low DTI can improve your chances of approval.
The Bottom Line
A DTI ratio is an important factor when it comes to key lending decisions, but it's not the only one. You'll also want to keep your credit score in good shape and maintain regular 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 harming you financially, you also have several options for managing your student loans at your disposal. These include refinancing or choosing a new repayment plan that leads to a lower monthly payment, thus reducing your DTI.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
Consumer Financial Protection Bureau. “What Is a Debt-to-Income Ratio?”
Consumer Financial Protection Bureau. "Debt-to-Income Calculator," Page 2.
InCharge. “Debt-to-Income Ratio.”
Federal Student Aid. "Federal Versus Private Loans."
Federal Student Aid. "Federal Student Loan Repayment Plans."
Federal Student Aid. "Income-Driven Repayment Plans."
Federal Student Aid. "The Saving on a Valuable Education (SAVE) Plan Offers Lower Monthly Loan Payments."
U.S. Department of Education. “Department of Education Updates on Saving on a Valuable Education (SAVE Plan).”
