Student loans affect debt-to-income ratios, credit scores and more — how to protect yourself

Understanding How Student Loan Debt Affects Your Credit Score

Student loans affect debt-to-income ratios, credit scores and more — how to protect yourself

It can be hard for students and young people to build a good credit score. You need good credit to get a loan, but you need to get a loan to build up good credit.

There are a few ways to escape this paradox, such as acquiring a secured credit card or getting a loan from a credit union.

However, utilizing student loans is perhaps the easiest way for young people to build and establish a solid credit history.

Student loans are considered a “good” type of credit, and having them on your report will help you quickly get a solid FICO score – as long as you make the payments on time.

Plus, deferral and forbearance options make it possible to postpone repaying your student loans without lowering your credit score.

But student loans are difficult (if not impossible) to discharge through bankruptcy, so once you get them, you have them for life.

To understand how student loans follow you throughout your working life and influence your financial health, it’s important to consider what type of loan you are taking, what sort of repayment plan you will face, and what options you have regarding deferral, consolidation, and repayment.

Student Loan Payment History

Student loans, other types of consumer debt, are reported to the three major credit bureaus. If you make your student loan payments before the due date, you will establish a good credit history, and that will improve your credit score.

Private and public loans both appear on your credit report. The three credit bureaus – Experian, Equifax, and Transunion – do not weigh public or private loans more heavily than the other, so late payments on either lower your credit score equally.

There is a distinction as to how private and public student loans can be paid off, and this is where the difference is most important from a credit history perspective.

Student Loan Deferral and Forbearance

Un private loans, federal loans allow the debtor to defer or forebear payments. This doesn’t affect your score, but it can influence a lender’s decision on whether to approve you for a loan.

What’s the difference? A loan deferral is a temporary period during which time you do not have to pay the principal balance of your loan.

For example, if you have a $10,000 student loan in deferral, you do not have to pay any of that $10,000 back. You may, however, still have to pay interest that accrues on the loan.

If the loan carries 5% interest, you may still have to pay for this interest – in this case, about $41.67 per month.

A loan forbearance is pretty much the same thing, but is for people who do not qualify for a loan deferral. Forbearances are granted on a case-by-case basis, and allow people to postpone repaying their student loans for a fixed period of time.

Both deferrals and forbearances have the same impact on your credit. Neither show up on your credit report; while the loan is in deferment or forbearance, it will appear as “current” on your credit report and impacts your credit score just as if you had been making payments on time.

However, lenders – particularly mortgage lenders – often investigate student loans that have not been repaid and have a higher balance than they should given the initial balance of the loan and the current amount owed. If they find that a loan is still in deferral or forbearance, they may deny a loan application, even if the applicant’s credit score is still good.

Late Payments or Defaulting

While deferrals and forbearances do not impact a credit score, late payments and defaults have an immediate negative effect on your credit report. If a payment is more than 30 days late, it will begin to impact your credit score, knocking it down by 30 points or more.

The longer your student loan payments are late, the lower your credit score falls, until your credit score is in the “poor” category.

Eventually, the lender will conclude that you will never pay your student loan, and report that you have defaulted on the student loan. This makes your credit score fall further.

 Lenders report both defaults from late payments and defaults from non-payment, and both can knock your FICO score into the “poor” range.

Normally, late payments and defaults remain on a credit report for seven years, after which they disappear. However, student loans are an important exception.

Un other types of debt, student loan defaults will remain on your credit history forever, and it is impossible to discharge most student loan debt in bankruptcy.

If you default, the default remains on your record until you pay back the loan.

Debt-to-Income Ratio

Of course, student loans need to be paid off any other debt, and the amount of your student loan monthly payments is factored into your debt-to-income ratio.

While this figure isn’t directly a factor in your credit score, it does play an important role when lenders consider extended mortgages, car loans, personal loans, and business loans to applicants, so it’s something you should keep in mind.

A high debt-to-income ratio caused by a lot of student loans makes it harder for you to qualify for other types of loans until those student loans are paid off.

Student Loan Cancellation and Forgiveness

There are some rare cases in which student loans are cancelled or forgiven, usually as a fringe bonus for people who sign up for volunteer or military service, or for others in specific occupations. Loans can also be forgiven in other situations of extreme financial and legal hardship.

From the credit bureaus’ perspective, student loan cancellation and forgiveness all looks the same: It’s a debt discharge caused by non-credit factors, and loan forgiveness does not have any impact on your credit score. However, picky lenders may ask why the loans were canceled before granting a mortgage or personal loan.

Income-Based Repayment

In response to skyrocketing tuition costs and student loan debt – which in 2011 exceeded $1 trillion to become the largest form of consumer debt in America besides mortgages – the United States government established the income-based repayment (IBR) program.

If you pay a large portion of your salary toward student loan debt, you might qualify for lower payments in accordance with the IBR program. For instance, if you are married and have a household income of $60,000, you would pay $465 per month ($5,580 annually) in student loan payments in the IBR program.

If you are paying more, you can apply to join the program and have your payments reduced.

Being in the IBR program has no impact on your credit score, nor is the information reported to the bureaus, so enrolling does not impact your creditworthiness.

However, the IBR program is only available for public, federally guaranteed student loans; private loans do not qualify.

This is why it’s important to consider carefully which student loans you are taking out, what repayment plan you will face after graduation, and what deferral options are available.

Final Word

Student loan debt and tuition are ly to continue to rise, so it’s important to understand how this debt will impact your financial future.

It may seem abstract now to think about the interest rate you will pay on buying a house years down the line, but mismanaging student debt now could cost thousands of dollars in higher interest payments in the future – or, worse, make it impossible to get a loan at all.

While student loan payments are a struggle on their own, the added cost and frustration of a lower credit score caused by mismanaging student debt could make things even worse.

Do you have student loan debt? How has it affected your credit score?


Debt-to-Income Ratio

Student loans affect debt-to-income ratios, credit scores and more — how to protect yourself

Your debt-to-income ratio (DTI) compares the total amount you owe every month to the total amount you earn. Lenders may consider your debt-to-income ratio in tandem with credit reports and credit scores when weighing credit applications.

To calculate your DTI, divide your total recurring monthly debt (such as credit card payments, mortgage, and auto loan) by your gross monthly income (the total amount you make each month before taxes, withholdings, and expenses). For example, if your total monthly debt is $3,000, and your gross monthly income is $6,000, you would divide 3,000 by 6,000 to get .5 or 50%.

Your income is not included in your credit report, so your DTI never affects your credit report or credit score. However, many lenders calculate your DTI when deciding to offer you credit.

That's because DTI is considered an indicator of whether you'll be able to repay a loan. If you have a low DTI, meaning you make much more than you owe, you might be better able to repay a new loan.

However, if you already have a lot of debt, taking out additional credit might make it difficult for you to meet your financial obligations.

What's a Good Debt-to-Income Ratio?

Generally, to get a qualified mortgage, your DTI needs to be below 43%. In fact, the lower your DTI the better, and many lenders prefer ratios below 36%.

There are also two types of DTIs — front-end and back-end:

  • Front-end DTIs examine only how much of your gross income goes toward housing costs, including mortgage payments, property taxes and homeowner's insurance.
  • Back-end DTIs compare gross income to all monthly debt payments, including housing, credit cards, automobile loans, student loans and any other type of debt.

If you're applying for a mortgage, many lenders will prefer a front-end DTI of less than 28%. To qualify for an FHA loan, you'll need a front-end ratio of less than 31%.

How to Improve Your Debt-to-Income Ratio

When you're applying for a mortgage, improving your debt-to-income ratio can make a difference in how lenders view you. Several steps can help you achieve a lower DTI, including:

  • Reduce your total debt by paying off credit cards and paying down any other loans that you can.
  • Avoid taking on new debt.
  • Consider a debt consolidation loan to make it easier to reduce debt faster.
  • Improve your income by asking for a raise, getting a second job or finding a new primary job that pays more.
  • Review your budget to see where you could save money to put toward paying down debt. If you don't have a budget, start one.

How Debt Affects Your Credit Scores

Since income does not appear on your credit report and is not a factor in credit scoring, your DTI ratio doesn't directly affect your credit report or credit scores.

However, while your income is not reported to credit bureaus, the amount of debt you have is directly related to multiple factors that do affect your credit scores, including your credit utilization ratio.

This ratio compares your total revolving debt (such as credit cards) with the total amount of credit you have available. Credit utilization ratios are important factors in determining many credit scores.

Other ways your debt can affect your credit scores include:

  • The total amount of debt you have
  • The age of loans or revolving debts
  • The mix of types of credit you're using
  • How many recent hard inquiries have been made into your credit report
  • How consistently you've paid your debts over time

How Your DTI is Used by Lenders

When you apply for a mortgage, lenders will look at DTI, your credit history and your current credit scores. Why? Because all this information taken together can help them better understand how ly you will be to repay any money they loan to you.

While there's no immediate way to improve a credit score, certain actions can help (and in the long run, can show your overall understanding and application of successful credit behaviors), and can start you on a better path today.

Think about:

  • Pay down existing debt, especially revolving debt credit cards. This will help improve both your DTI and your credit utilization ratio.
  • Pay all bills on time every month. Late or missed payments appear as negative information on credit reports.
  • Avoid applying for any new credit, as too many hard inquiries in a short time frame could affect your credit scores.
  • Use your existing credit wisely. For example, make a small purchase with a credit card and pay off the full balance right away to help establish a positive payment history.


How To Buy A House When You Have Student Loan Debt

Student loans affect debt-to-income ratios, credit scores and more — how to protect yourself

The majority of millennials don’t own a home — and many say their student loans are a major reason for that. According to a 2019 survey from Bankrate, 61 percent of millennials don’t yet own a home, and nearly a quarter of them say student loan debt is what’s holding them back.

Data from the Institute for College Access and Success shows that 62 percent of college graduates financed their higher education with loans, and as of last year, the average balance was $28,950.

These debts hold back potential homebuyers in two major ways. First, they raise a prospective homebuyer’s debt-to-income ratio, which makes it more difficult for them to secure a mortgage.  Second, they can make it harder to save for a down payment.

Despite those obstacles though, student loan debt doesn’t automatically preclude you from buying a house. While it does make the process more challenging, you can become a homeowner with student debt. If you’re looking to buy your first house, but student loan debts are holding you back, this guide can help you navigate the process and come out on top.

Step 1: Improve your debt-to-income ratio

One of the best things you can do to improve your chances of getting a mortgage loan is to lower your debt-to-income ratio.

Your debt-to-income ratio (or DTI) is one of the most important factors a lender will look at when evaluating your application.

They want to ensure you’ll be able to afford your new mortgage payment, while also staying current on all your existing debts, student loans included.

For most mortgage loans, you can’t have a DTI higher than 28 percent going into your application on the front-end in order to be considered a good candidate. On the back-end, which includes your estimated mortgage and housing expense, 36 percent is the maximum for most conventional loans. If you don’t fall under this threshold, then there are a few things you can do to improve it:

  • Pay down your debts as much as possible. Work on whittling down your student loan debts, credit card debts, and other balances. Use your tax refunds, holiday bonuses, or any extra funds you have to make a dent. Even a small reduction in balances can help put the percentages in your favor.
  • Increase your income. If you’ve been at your job a while, you may be able to ask for a raise. If not, a second job, side gig, or freelance work can help supplement your income and improve your DTI.
  • Refinance or consolidate your student loans. Doing this may allow you to lower your monthly payment and the interest you’ll pay over the life of the loan. That will cut your monthly budget and over the long term, will improve your DTI in the process.
  • Enroll in an income-based repayment plan. Income-driven repayment plans allow you to lower your monthly student loan payments to align with your current income level. These typically allow you to make payments as low as 10-15 percent of your monthly income, and can ease some pressure on your budget.

Don’t know what your current DTI is? Use our debt-to-income ratio calculator to get an idea.

Step 2: Increase your credit score

Your credit score also plays a big role in your mortgage application, because lenders use it to evaluate how risky you are as a borrower. A higher score will typically mean an easier approval process and, more importantly, a lower interest rate on your loan.

Making consistent, on-time student loan payments is a good way to build credit and increase your score. You can also:

  • Lower your credit utilization rate. Your credit utilization rate is essentially how much of your total available credit you’re utilizing. The less you’re using, the better it is for your score. Credit utilization accounts for 30 percent of your total score, and the easiest way to lower your rate is to pay down outstanding debts.
  • Pay your bills on time. Payment history is another 35 percent of your score, so make sure to pay every bill (credit cards, loans, even your gym bill) on time, every time. Set up autopay if you need to, as late payments can send your score plummeting.
  • Keep paid-off accounts open. The length of your credit history matters, too, accounting for 15 percent of your score. Leaving long-standing accounts open (even once paid off) can help you in this department.
  • Avoid new credit lines. Don’t apply for any new credit cards or loans as you prepare to buy a home. These require hard credit inquiries, which can have a negative impact on your score.

Finally, make sure to check your credit report often. If you spot an error or miscalculation, report it to the credit bureau immediately to get it remedied.

Shopping for that dream house is definitely the most exciting part of the process, but before you can start, you should get pre-approved for your mortgage loan.

A pre-approval lets you know how big a loan you’ll ly qualify for, which can help guide your home search and ensure you stay on budget.

Additionally, a pre-approval can show sellers you’re serious about a home purchase and may give you a leg up on other buyers.

When applying for pre-approval, you’ll need to:

  • Provide information regarding your income, debts, past residences, employment, and more. You will also need to agree to a credit check.
  • You’ll need to know what down payment you can offer. If you’re going to use gift money from a loved one, you’ll need a gift letter from the donor saying it doesn’t need to be paid back.
  • You’ll have to provide some documentation. Your lender will need recent pay stubs, bank statements, W-2s, tax returns, and other financial paperwork in order to evaluate your application.

If you want your pre-approval application to go smoothly, go ahead and gather your financial documentation early, and have it ready to go once your lender requests it.

Step 4: Consider down payment assistance

If your student loans are making it hard to save up that down payment (and you don’t have gift money coming from a family member or other donor), you’re not completely luck. There are a number of assistance programs that can help you cover both your down payment and closing costs on your loan.

The assistance usually takes one of four forms:

  1. A down payment grant. These are interest-free and do not need to be repaid
  2. Forgivable second mortgages. These are technically second mortgage loans on top of the one used to finance your house, but are forgiven if you live in the home for a certain number of years.
  3. Traditional second mortgage. These programs give you assistance via a low-interest loan and need to be paid off monthly, just as your primary mortgage does.
  4. Matched savings programs. These programs encourage you to save up funds in a dedicated down payment savings account. Then, the institution or agency offering the program matches those funds, usually up to a certain threshold.

To qualify for these programs, you might need to:

  • Be a first-time homebuyer
  • Have an income below a certain threshold
  • Complete a homebuyer education course
  • Be a military member, veteran, or public servant (teacher, firefighter, EMT, etc.)
  • Commit to a certain level of savings each month

Agencies may also consider your credit score, debt-to-income ratio, and other financial factors when evaluating your application for assistance. The location you’re buying in and its median income could also play a role.

Step 5: Look into first-time homebuyer loans and programs

In addition to down payment assistance programs, you can also take advantage of one of the many first-time homebuyer mortgage programs that are offered by both the federal government and state-based agencies. These programs offer low interest rates, and many have no down payment requirement, which can be an especially big boost if you’re dealing with a heavy student loan burden.

Federal options

Check out the table below for a list of federal first-time homebuyer programs and the specific requirements for each.

State options

Individual states also have their own first-time home buyer programs and assistance offerings. Many of these help with closing costs, down payments, and more. There are also state-backed loan programs that can reduce your interest rate, lower your monthly payment and help you save significantly over the course of your loan if you qualify.

You’ll find a full list of state-specific resources at

Step 6: Find a co-borrower

If you have a fellow grad or a friend or family member who also wants to get the rent race, teaming up to buy a house could benefit you both. In this scenario, they become your “co-borrower,” applying for the mortgage loan jointly with you.

The advantage here is that it allows both of your incomes and credit profiles to impact the application.

That could mean qualifying a higher loan balance, an easier approval process or a lower interest rate if they have a solid financial foundation.

You can also pool your savings for a bigger down payment — another step that will lower your monthly housing costs and save you big on long-term interest.

Keep in mind though: if you apply with a co-borrower, their debts and credit score also count toward your application. So, it might not be helpful if their financial position isn’t strong.

If you don’t want to outright purchase a house with someone else, you could also ask a friend or relative to become a co-signer or guarantor on your loan. This would allow lenders to consider their income and credit on your loan application, but it wouldn’t actually give them ownership of the property.

The bottom line

Student loan debt can be a drag, especially if you’re trying to buy a house. Fortunately, there are options. By taking advantage of the right loan programs, working on your credit and DTI and teaming up with the right partners, you can improve your chances significantly, not to mention lower the cost of buying a home both up front and for the long haul.

Learn more:


5 Ways Student Loans Can Impact Your Credit Score

Student loans affect debt-to-income ratios, credit scores and more — how to protect yourself

Image credit: Getty Images

Student loans are some of the first debt young adults take on. all types of debt, the way you handle it could help or hurt your chances of securing credit in the future.

Want to keep your credit score high while you're paying back your student loans? You need to understand how lenders calculate your score and how student debt affects it.

The five factors that make up your credit score

There are several credit scoring models in use today; the two most popular are FICO® and VantageScore. Both use a scale ranging from 300 to 850. A higher score indicates a greater degree of financial responsibility.

Each system looks at the same factors but weighs them differently. The five biggest factors are:

  1. Payment history
  2. Credit utilization ratio
  3. Length of credit history
  4. Credit mix
  5. Number of hard inquiries

Here's a closer look at how your student loans can impact all of these factors.

1. Payment history

Your payment history is the single biggest factor that determines your credit score. It accounts for 35% of your FICO® Score, which is the one most commonly used by lenders. Payment history is a key measure of financial responsibility, and failing to pay back your debt on time could indicate that you're living beyond your means. And that means you’re at risk of default.

The effect of a late payment depends on how late the payment was and your current credit score. Creditors usually don't report late payments until they're 30 days late, and payments that are 60 or 90 days late will damage your score more than a 30-day-late payment.

It may seem counterintuitive, but the higher your credit score is, the more a late payment will hurt it. FICO® says a single 30-day late payment could drop a 780 score by over 100 points. When your score is lower to begin with, there isn't as far to fall. So a late payment may not hurt your credit score as much.

If you miss enough payments that your student loan goes into default, this will appear on your credit report, too. And it'll stay there for seven years. This devastates your ability to take out new loans and lines of credit. Fortunately, if you have a federal student loan, you may be able to rehabilitate it and remove the default from your credit history.

A good payment history helps boost your credit score. If you make at least the minimum payment by the due date every month, your credit score will begin to rise. This is a great way to establish yourself as a responsible payer and make it easier to get new loans and lines of credit.

2. Credit utilization ratio

Your credit utilization ratio is the percentage of your total available credit that you're using. This mostly applies to revolving debt credit cards, where you can borrow up to a certain amount each month.

If you have a $10,000 credit limit and you use $2,000 per month, your credit utilization ratio is 20%. But student loan debt is considered installment debt because of its regular monthly payments. Installment debt has a smaller impact on your credit utilization ratio.

It still impacts your score to some degree, especially early on when the bulk of your student loan debt is still outstanding. But carrying $20,000 in student loan debt won't hurt you nearly as much as $20,000 in credit card debt.

As long as you keep your revolving credit utilization low and you haven't taken out a bunch of other loans at the same time, you shouldn't have to worry about your student loans’ impact on your credit utilization ratio.

3. Length of credit history

Your credit report records how long you've been using credit and how long your credit accounts have been open. Lenders to see a long credit history because it gives them a better sense of how well you manage your money.

Taking out student loans can help you get an early start on building your credit history. The standard federal student loan repayment term is 10 years, so the loan stays on your credit score for a long time. This helps raise your average account age.

But that doesn't mean you shouldn't pay off your student loans early if you can. The small boost it may give to your credit score probably isn't worth all the extra you'll pay in interest if you're only making the minimum payment.

4. Credit mix

As I mentioned above, credit is broken down into two types: revolving debt and installment debt.

The most common form of revolving debt is credit cards. They enable you to borrow up to a certain amount, but the actual amount that you borrow may vary from one month to the next. Installment debt, on the other hand, has predictable monthly payments for a set period of time. Student loans fall under this category, as do mortgages, auto loans, and personal loans.

Having revolving and installment debt gives your credit score a slight boost by showing you can be responsible with different kinds of debt. Many college students have credit cards, and student loans can add installment debt to the mix.

Having a good credit mix only has a small impact on your credit score. But it's an easy way to earn a few extra points.

5. Number of hard inquiries

When you apply for a student loan or any type of credit, the lender does a hard inquiry on your credit report. This is where they pull your credit reports to assess your financial responsibility. Un a soft credit inquiry, which won't affect your credit score, a hard credit inquiry will drop your score by a few points.

Lenders understand that borrowers shop around and compare rates when taking out a loan or line of credit, so most credit scoring models consider all inquiries within a 30- to 45-day period as a single inquiry. Keep this in mind when shopping for student loans and try to submit all of your applications within a month of each other so you don't end up with multiple inquiries on your report.

Bonus: debt-to-income ratio

Your debt-to-income ratio isn't a part of your credit score, but lenders look at it when assessing how ly you are to make your payments. It's a measure of your monthly debt payments compared to your monthly earnings.

Each lender will have its own opinion on what constitutes an acceptable debt-to-income ratio. But you generally don't want yours to exceed 30%. The lower you can keep it, the better.

You may not have much control over your student loan payments or your income — especially when you're fresh college. But you can reduce your debt-to-income ratio by diligently making payments, paying extra when you can, and pursuing promotions to raise your income. Be careful not to take on too much other debt, credit card debt, in the meantime.

Student loans have tremendous power to improve or ruin your credit, but by understanding the ways they affect your credit score, you can take steps to make sure your student loan debt reflects well on you.

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Student loans affect debt-to-income ratios, credit scores and more — how to protect yourself

Student loans affect debt-to-income ratios, credit scores and more — how to protect yourself

Millions of Americans feel the stress of student loans. According to the Office of Federal Student Aid, more than 45 million people have federal student loans, accounting for over $1.5 trillion in total debt owed.

These debts, while manageable for some, have the ability to wreak havoc on the financial lives of others. They hurt debt-to-income ratios, lower credit scores, and make it harder to invest, save, and even prepare for emergencies. They can also put goals buying a car or house reach as well.

If you have student loans, it’s important to be diligent in how you manage and repay them — especially if you want to safeguard your financial health.

How student loans affect your finances

Student loan debt can put a strain on anyone’s personal finances — both current ones and those down the road. Specifically, they can impact your:

Credit score

When you take out a student loan (or any loan, for that matter), it shows up on your credit report. Your payments do, too, and they have the power to send your score up or down, depending on how you manage your loan.


Late payments are particularly detrimental to your credit score, according to Rick Castellano, a spokesperson at student loan company Sallie Mae. “Loans become delinquent after you miss your payment due date. Late payments may be reported to consumer reporting agencies, which can impact your credit score.”

On-time payments (especially over a long period of time) can do the opposite, actually improving your score.

Debt-to-income ratio

The higher your loan balances are, the higher your debt-to-income (DTI) ratio goes (the portion of your monthly income that goes towards debt repayment). DTI plays a role in what financial products you can qualify for, including credit cards, loans, and even mortgages. A high DTI can significantly limit your financial options.

Your savings efforts

It can be difficult to save for retirement when all your funds are going toward your student loans.

Those balances can also impact your ability to invest and build wealth for the future, and they could even make it hard to build up an emergency savings account.

According to a recent study from JPMorgan Chase, the average family needs at least six weeks of take-home pay saved up to weather an income change or other emergency. Nearly two-thirds of households don’t currently have this.

How to stop student loans from derailing your life

Letting your student loans fall into default is probably the worst thing you can do for your financial health. Not only does it mean paying more in interest (plus potential collections fees), but you also may see money taken straight from your paycheck or have your tax refund withheld until the balance is repaid.


Here are some steps you should take to protect your financial health (and keep those loans in check while you do):

  1. Consider an income-based repayment plan. These plans base your monthly student loan payment on your income level, making payments more manageable and helping you avoid late payments (which could hurt your credit score or lead to default). They also free up more cash so you can save, invest, and keep your head above water.
  2. Think about refinancing your loans. This could qualify you for a lower interest rate and, thus, a lower payment. Use the saved funds to put toward your emergency savings fund, retirement, or to achieve a major financial goal, buying a house or a car.
  3. Know where your focus is. While it might be tempting to make large payments to pay down your student loans as quickly as possible, it’s not always the most beneficial move for your wealth. In some cases, it may be better to invest than to pay off those loans faster. Do a full comparison to see where you should focus.
  4. Set up autopay. If you have private student loans, many lenders will give you a discount on your interest rate just for setting up autopayments. If you’re able to score this perk, put the cash you save toward that homebuying fund or emergency savings account.
  5. Shop around for your savings accounts. Don’t just choose the first savings account you find. Compare banks and credit unions, and make sure you’re getting the highest interest rate possible. This will maximize how much you accumulate over time — even if you can only stow away a minimal amount of cash.

You might also consider consulting a financial planner for more personalized advice, and Castellano recommends reviewing your credit report regularly to check on your financial health. “A user is allowed three free credit reports annually.

On these reports, you can see all your loans and debt, whether they are federal student loans, private student loans, or both.

This is a good time to not only check on the status of the loans, but to make sure everything on the credit report is accurate.”

How to minimize student loan debt

Minimizing the number of student loans you take out is the best way to safeguard your credit and your personal finances. Consider grants and scholarships before dipping into the loan pool, and always call your lender before skipping a payment or letting your loans fall into default. The long-term costs of these slip-ups can be significant.


Student Loan 101: What is Debt-to-Income Ratio?

Student loans affect debt-to-income ratios, credit scores and more — how to protect yourself

A debt-to-income ratio is the percentage of gross monthly income that is used to repay debt, such as student loans, credit cards, auto loans and home mortgages.

The debt-to-income ratio (DTI) is a measure of the borrower’s financial health.

A low debt-to-income ratio indicates that you can afford to repay their loans without experiencing severe financial stress. A high debt-to-income ratio may mean that you are over-extended and do not have sufficient income to repay your loans.

Two Types of Debt-to-Income Ratios

There are actually two different types of debt-to-income ratios.

Strictly speaking, the term “debt-to-income ratio” is supposed to mean the ratio of total debt to annual income. But, the debt-to-income ratio has come to defined as a payment ratio, which is the ratio of monthly loan payments to gross monthly income. It is also known as a debt-service-to-income ratio.

For example, the rule of thumb that total student loan debt at graduation should be less than your annual income is the equivalent of a traditional debt-to-income ratio less than 100%. Depending on the interest rate and repayment term, this is the equivalent of a payment ratio of 10% to 15%.

In this article, the term “debt-to-income ratio” refers to a payment ratio.

Do not confuse the debt-to-income ratio with your credit utilization ratio, which is sometimes called a debt-to-limit ratio. The credit utilization ratio is the percentage of available credit that is currently in use.

It is the ratio of outstanding debt to the credit limits. The credit utilization ratio is used with revolving debt, such as credit cards, to determine if you are maxing out your credit cards.

Lenders to see a credit utilization ratio that is 6% or less.

The U.S. Department of Education’s gainful employment rules were two different types of debt-to-income ratios. One was a payment ratio that compared monthly loan payments to monthly income. The other compared monthly loan payments to discretionary income.

How Do Lenders Use the Debt-to-Income Ratio?

Lenders prefer borrowers who have a low debt-to-income ratio. A lower debt-to-income ratio increases the amount you can afford to borrow. Reducing your debt-to-income ratio can increase your eligibility for a private student loan. 

The debt-to-income ratio is unrelated to your credit scores. Your credit history does not include your income, so your debt-to-income ratio does not appear in your credit reports.

Rather, lenders calculate your debt-to-income ratio themselves using the information on your loan application and your credit history.

They combine the debt-to-income ratio with credit scores, minimum income thresholds and other factors to determine your eligibility for a loan.

What is a Good Debt-to-Income Ratio?

A low debt-to-income ratio is better, when seeking a new loan, because it means you can afford to repay more debt than someone with a high debt-to-income ratio.

For student loans, it is best to have a student loan debt-to-income ratio that is under 10%, with a stretch limit of 15% if you do not have many other types of loans. Your total student loan debt should be less than your annual income.

When refinancing student loans, most lenders will not approve a private student loan if your debt-to-income ratio for all debt payments is more than 50%. 

Keep in mind that refinancing federal loans means a loss in many benefits – income-driven repayment plans, any federal loan forgiveness opportunities, generous deferment options, and more.

When borrowing a mortgage, most mortgage lenders consider two debt-to-income ratios, one for mortgage debt payments and one for all recurring debt payments, expressed as a percentage of gross monthly income. The recurring debt payments include credit card payments, auto loans and student loans, in addition to mortgage payments.

Typically, the limits are 28% for mortgage debt and 36% for all debt. The maximum debt-to-income ratios are 31% and 43%, respectively, for FHA mortgages, and 45% and 49% for Fannie Mae and Freddie Mac.

So, borrowing or cosigning a student loan can affect your ability to get a mortgage.

How to Calculate Your Debt-to-Income Ratio

To calculate your debt-to-income ratio, follow these steps.

  • Calculate your total monthly loan payments by adding them together. Look on your credit reports for your monthly loan payments.
  • Divide the total monthly loan payments by your gross monthly income. Calculate your gross monthly income by dividing your annual salary by 12.
  • Express the resulting ratio as a percentage.

This is the formula for calculating your debt-to-income ratio.

For example, suppose you owe $30,000 in student loan debt with a 5% interest rate and a 10-year repayment term. Your monthly student loan payment will be $318.20. If your annual income is $48,000, your gross monthly income will be $4,000. Then, your debt-to-income ratio is $318.20 / $4,000 = 7.96%, or about 8%.

If you switch to a 20-year repayment term, your monthly student loan payment will drop to $197.99. This will cause your debt-to-income ratio to drop to 4.95%, or about 5%.

How to Reduce Your Debt-to-Income Ratio

Fundamentally, reducing your debt-to-income ratio involves reducing your loan payments and increasing your income.

With student loans, you can reduce your monthly loan payment by choosing a repayment plan with a longer repayment term, such as extended repayment or income-driven repayment.

Other options include aggressively paying down your debt, qualifying for student loan forgiveness and refinancing to get a lower interest rate and a lower monthly loan payment.

Do not cosign loans, because a cosigned loan counts as though it were your loan on your credit reports.

Cut your spending and pay for purchases with cash instead of credit. Do not carry a balance on your credit cards. Do not get more credit cards. Delay any large purchases that may affect your debt-to-income ratio, such as buying a new car.

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