The two most everyday factors in getting approved for student loan refinancing are a borrower’s credit score and debt-to-income ratio. Where credit score is a reasonably straightforward term to understand, debt-to-income ratios (DTIs) are a bit more complicated.
In order to sort out this issue, we reached out to a number of student loan refinance companies to inquire about their DTI requirements. Many were not willing to share specific DTI requirements, but we received enough responses to have a pretty good idea about what most lenders require.
Debt-to-Income Ratio Basics
An applicant’s debt-to-income ratio is their total monthly debt payments divided by their total gross income.
To calculate your DTI, first add up all of your monthly debts as they appear on your credit report.
These monthly debts can include:
- Mortgage or rent payments
- Minimum payments for credit cards
- Car loans
- Student loans
- Personal loans
- Alimony and child support
- Any other debt that shows up on your credit report
Gross income is your total monthly salary before taxes and other deductions.
Typically DTI is expressed as a percentage. If your total monthly debts add up to $2,000 and your monthly income is $5,000, your DTI will be 40% (2,000 divided by 5,000 equals .40). If you don’t want to do the basic math, a simple calculator can be found here.
Items Not Included in DTI Calculations
The term “monthly expenses” can be a bit misleading.
Getting a bill each month does not make an expense a “monthly expense” for purposes of DTI calculations. The important detail is whether or not the payment appears on the applicant’s credit report.
Thus, many common monthly expenses know in DTI calculations.
The following are unlikely to affect your DTI:
- Grocery bills
- Cell phone bills
- Insurance expenses
- Utilities and cable
- Netflix, hulu, and other streaming services
- Subscription and software services like Spotify or Microsoft Office
In other words, if the bill doesn’t appear on your credit report and a lender doesn’t ask about it, an expense is unlikely to be included in your DTI.
Refinance Lender Debt-to-Income Ratio Requirements
Before jumping into specific numbers, we should point out that DTI calculations and requirements are not an exact science. Your DTI may go up or down depending upon the credit bureau a lender checks. Your credit score can also have an impact on the DTI a lender will accept. If your credit score is excellent, a lender may tolerate a higher DTI. If you have a cosigner, a lender may accept a higher DTI.
When we surveyed the refinance lenders, we were able to learn the following:
|Lender||Maximum DTI||Lender Application|
+ $150 Bonus
|33 – 50%||Application |
+ $150 Bonus
Earnest having the highest acceptable DTI is not a surprise because they ask for the most financial information from applicants. If your finances are strong despite a high DTI, Earnest may be a good bet for approval.
Other lenders required a DTI right around 50%. We suspect that the lenders that responded to our survey are the ones with the more borrower-friendly DTI requirements. Refinance companies want to encourage people to apply, and those with strict DTI requirements are probably less likely to share that information. Thus, borrowers looking to refinance their student loans but concerned about their DTI should strongly consider the companies listed above.
Improving Your DTI
If you have run the numbers and your DTI looks ugly, there is still hope.
There are several ways to improve a DTI without having to spend a ton of money.
Pay down credit card balances – Reducing most balances does not help your DTI. If your mortgage payment is $1,100 per month, paying extra towards your mortgage each month will not change the payment or your DTI. Credit cards are a notable exception. The lower your credit card balance, the lower your minimum payment will be. If you can pay a little extra towards your credit card debt, you can improve your DTI.
Change repayment plans – Federal student loans show up on your credit report. Changing repayment plans can cause the loan servicers to report a lower monthly payment. If you are on the standard repayment plan, consider switching to an income-driven repayment plan. You can estimate monthly payments on the various repayment plans with the Department of Education’s Repayment Estimator.
Get released as a co-signer – Debt you have co-signed is a gray area for DTI calculations. Some lenders will allow applicants to submit documentation showing that the named borrower is making payments, but this is far from a sure thing. Because most approval decisions are made automatically by a computer, you should assume that co-signed loans will be included. If you can get released as a co-signer on someone else’s debt, it will help your DTI.
Make sure your credit report is accurate – If there is a mistake on your credit report, it could be showing debt that is not your responsibility. Be sure to take a close look at your credit report to find any errors. If there is an error, work with the credit bureaus to get it removed before applying to refinance your student loans.
Wait for old debts to fall off – Did you just pay off your car? Have you finally eliminated a credit card? These items do not immediately fall off a credit report. It can take a month or two before the debt that has been paid in full is removed from a credit report.
Final Thoughts on Debt-to-Income Ratios
Navigating DTIs in search of a student loan refinance approval is not an exact science. Each lender uses a slightly different formula, and depending upon your credit score, the maximum acceptable DTI could vary.
The important thing to understand is that debt-to-income ratios are one of the most important numbers for any credit application. If you understand how it works, you can find ways to improve your DTI.