Refinancing can be an incredibly effective strategy for managing your student loan debt. You can potentially lower your interest rate, combine your loans, and even get a lower monthly payment. However, you have to meet lenders’ criteria to qualify. 

When you apply for refinancing, lenders will review your credit score, income, and your debt-to-income ratio (DTI). If your DTI is too high, the lender will reject your application. 

What Is a Debt-to-Income Ratio? 

Your DTI is the total of all of your monthly debt payments divided by your gross monthly income — the money you earn each month before taxes or retirement contributions. For example, let’s say you earn $4,000 per month and have the following monthly payments: 

• $400 in student loan payments
• $350 in car loan payments
• $250 in credit card payments

The total of your debt is $1,000. When you divide your debt by your income, you get your DTI. In this case, your DTI is 25% — your debt payments take up 25% of your gross monthly income. 

Do Student Loans Affect Debt-to-Income Ratio? 

Because education loans are often referred to as “good debt,” many borrowers mistakenly believe that their student loans don’t affect their DTI. Unfortunately, that’s not the case. Your student loan payments can take up a significant portion of your income, so lenders always include student loans when calculating your DTI.  

Why Do Lenders Look At the Debt-To-Income Ratio? 

Lenders look at the DTI to see if you can comfortably afford your loan payments. There have been studies in other forms of debt that show that borrowers with high DTIs are more likely to struggle with their payments on the new loan. As a result, most lenders have a maximum DTI that they’re willing to accept. The maximum acceptable DTI is dependent on the lender and the type of credit you want. 

What DTI Do I Need to Qualify for Student Loan Refinancing? 

When you apply for a refinancing loan, lenders will look at several factors when evaluating your application. Along with your credit score and income, lenders also take your DTI into consideration. Because student loan refinancing is offered by private lenders, the borrower requirements can vary by lender; there isn’t just one uniform criteria. 

In general, student loan refinancing lenders will only approve borrowers that have a DTI of 50% or less. If you earn $4,000 per month, that means your debt payments must be $2,000 or less to qualify for refinancing.

However, the lower your DTI, the better. If you have a very low DTI due to a high income or a very low level of debt, you’re a much more attractive applicant. You may be able to qualify for a lower interest rate than other borrowers, helping you save even more money.  

How to Refinance With a High Debt-to-Income Ratio

If you have a large number of student loans or multiple forms of debt, your DTI may be over the 50% threshold. If that’s the case, you may find it difficult to qualify for refinancing right now. However, you can improve your chances of qualifying by using these tips: 

1. Pay off Debt

List all of your debt and order them from the account with the lowest balance to the one with the highest. If you have any extra money left over after paying your bills, put that cash toward the account with the lowest balance. As you pay off each account, you’ll remove that monthly payment from your credit report and improve your DTI. 

2. Increase Your Income

If you can’t afford to pay off your accounts right now, another way to lower your DTI is to boost your income. If you’re eligible for a raise or promotion at work, that can be an excellent way to better your DTI. If that’s not an option, consider picking up a part-time job or a side gig; the income you earn from those jobs count toward your gross monthly income and can improve your DTI. 

3. Apply With a Co-signer

If your DTI is too high, another way to qualify for student loan refinancing is to apply for a loan with a co-signer. A co-signer can be a parent, relative, or close friend as long as they meet the lender’s credit score, income, and DTI requirements. Your co-signer shares responsibility for the loan; if you fall behind on your payments, the lender will require the co-signer to make them instead. 

Adding a co-signer decreases the lender’s level of risk, so they’re more likely to approve your application than if you applied on your own. 

Refinancing Your Student Loans

When you’re ready to refinance your student loans, check your rate first with Juno. Juno negotiates with lenders to get the best rates, and some lenders even offer special incentives like cash back or interest rate reductions to Juno members. Join Juno now to get started.