Editorial Note: We earn a commission on partner links on Forbes Advisor. Commissions do not affect the opinions or ratings of our editors.
Refinancing a student loan can be an effective way to settle your debt. If you can get a lower interest rate, you could save thousands of dollars and pay off your debt faster. However, not everyone will qualify.
If your debt-to-income ratio (DTI) – a number that reflects the amount of your income that goes towards paying off your debt each month – is too high, lenders will see you as a higher risk. A high DTI indicates that you may have overworked yourself and may have trouble paying your payments in the future.
However, some refinance lenders have less stringent DTI requirements than others, and there are ways to lower your DTI before submitting your refinance application.
What is a debt to income ratio?
Your debt-to-income ratio is a factor that creditors consider when deciding whether or not to approve you for a loan or credit card. Your DTI is the amount of your total monthly debts divided by your gross income, which is how much you earn before taxes and other deductions.
Lenders review your DTI to see if you can comfortably pay your payments with a new account. If your DTI is too high, it could indicate that you have too many claims on your paycheck and you may not be able to meet all of your payments in the future.
How do student loans affect the DTI?
Whether you are applying for a mortgage or want to refinance your student loan, your current student loan payments are included in the DTI formula.
To establish your DTI, lenders will review the accounts and monthly payment amounts shown on your credit report. You can calculate your own DTI by consulting your credit reports for free on AnnualCreditReport.com.
For example, suppose you earn $5,000 per month and have the following required payments:
- Credit card: $100
- Personal loan: $250
- Automatic loan: $250
- Federal Student Loan: $300
- Private student loan 1: $200
- Private student loan 2: $250
In total, you pay $1,350 for your debt and credit accounts. Divide that number by your monthly income – $5,000 – and you get 0.27. Multiply that by 100 to convert it to a percentage and you’ll find that your DTI is 27%.
What DTI is needed to refinance student loans?
Student loan refinance loans are issued by private lenders, so there is not one DTI that all lenders use to the max. They all have their own borrower eligibility criteria for credit scores, income, and DTI limits. In general, the lower your DTI, the better.
Although requirements vary by lender, these general guidelines can give you an idea of where you stand:
- DTI of 35% or less: Your DTI indicates that your debt is at a manageable level relative to your income, so you should be able to comfortably pay your payments. Most student loan refinance lenders will be happy to work with applicants with a DTI at this level, as long as they meet the lenders other criteria.
- DTI from 36% to 49%: If your DTI is in this range, you are probably managing your debt, but you may not have much wiggle room in your budget. Most student loan refinance lenders will still work with borrowers in this range, but you may need a cosigner if your credit score or income isn’t high enough.
- DTI of 50% or more: If your DTI is 50% or more, the majority of your income is spent on debt. This fact can make lenders wary, as an unforeseen emergency or other large expense could cause you to miss payments. Some student loan refinance lenders will work with borrowers at this level, but you’ll likely have fewer options.
For many lenders, their eligibility criteria are proprietary and they do not disclose their maximum DTI. Among the lenders who shared their requirements, we found that the maximum DTI for refinancing student loans ranged from 40% to 60%.
How to improve your DTI before refinancing
If your DTI is too high for most student loan refinance lenders, consider these tips for lowering it before submitting an application.
1. Enroll in an income-based reimbursement (IDR) plan
If you have federal student loans, you can take advantage of income-driven repayment plans to lower your payments and improve your DTI. With an IDR plan, your new payment is set using a longer loan term – 20 to 25 years – and a percentage of your Discretionary Income, which is calculated based on your family size and income.
You can significantly lower your monthly payments with an IDR plan, and lenders will look at the new payment as shown on your credit report to calculate your DTI. While this strategy can help reduce your DTI, remember that once you refinance your federal student loans, you will no longer be eligible for federal benefits such as IDR plans and you will have fewer options to defer. or waive your loans.
2. Pay off some of your debts
Besides student loans, you may have other forms of debt, such as car loans, credit card balances, or medical debt. If so, you can improve your DTI by paying off the account with the lowest balance. Paying off this debt will reduce your overall debt and eliminate one monthly payment, improving your DTI.
Alternatively, you can pay off the debt with the higher monthly payment. This will have the biggest impact on reducing your DTI because you’ll get rid of your biggest monthly debt load.
3. Increase your income
If possible, you can reduce your DTI by increasing your income. Whether you get a pay raise, receive a raise by changing jobs, or take on a second job or side business, lenders will consider consistent sources of income in their DTI calculations.
For example, suppose you earn $3,000 per month and have the following monthly payment obligations:
- Credit card: $200
- Automatic loan: $350
- Student loan: $600
In total, you have $1,150 in monthly obligations. Divide the amount by your income ($3,000) and you get a DTI of 38%.
If you were in the business of delivering groceries and earning an extra $500 per month, your total income would increase to $3,500 and your DTI would drop to just 32.8%, a significant improvement.
Tip: If you have a higher DTI and cannot qualify for a student loan refinance, look for a lender that allows you to apply with a co-signer. A co-signer is someone with good credit and a reliable income, and can be a trusted parent, relative, relative, or friend. If your cosigner has an established credit history, stable income, and low DTI, they can help you get a loan and get a better interest rate.
How to know if you qualify for student loan refinancing
Student loan refinance lenders review applicants’ DTIs as part of the application process. However, the maximum DTI allowed varies by lender, so it’s a good idea to shop around and compare quotes from multiple refinance lenders to find out if you qualify and to compare rates.
Many major student loan refinance lenders have prequalification tools you can use to check your loan eligibility — and see possible loan rates and options — without hurting your credit. Taking advantage of the prequalification tools allows you to see if a lender will accept your DTI as is, or if you need to improve it before you can get a loan.