Did you know that 43 million people around the United States owe federal student loan debt? In total, there is more than $1.6 trillion owed to the federal government for student loans.
At the same time, numbers are insufficient to explain what it means to have this quantity of student debt. After all, there are different kinds of debt. The effects of having this amount of student debt are different from the effects of having the same amount of another kind of debt.
As a result, not everyone is clear about whether or not their student loans affect various financial metrics. Do your student loans contribute to your debt-to-income ratio? Or does the fact that you received such loans from the government for the purposes of education mean that your student loans are exempted somehow?
Read on to learn all about the most important things to understand about how student loans affect your debt-to-income ratio!
What Is a Debt-to-Income Ratio?
Of course, the first thing to understand is what a debt-to-income ratio even is. As its name suggests, this is a simple ratio that compares how much debt you have to how much income you have.
You can see why this is such an important financial metric in certain situations. If someone has more debt than they have income, people may want to think twice before loaning them money.
After all, their high amount of debt suggests that they may have received many loans before and have not yet paid them back. Or it might suggest that they do not responsibly handle their finances.
On the other hand, the same amount of debt might not be concerning if someone has a much larger income. In other words, the amount of debt that might be concerning for one person might not be concerning for another.
As a result, people started tracking the debt-to-income ratio. By combining these two important numbers, you can get a decent sense of how much more debt someone can manage and how they tend to handle themselves when it comes to finances.
Most people are now familiar with the idea of dedicating some effort to enjoying a great credit score. However, not everyone realizes how much of a contributor their debt-to-income ratio is to their credit score.
On top of that, you should know that some people or institutions will also look at your debt-to-income ratio to assess whether to offer you loans or other financial opportunities. That makes it important to maintain the best debt-to-income ratio you can!
How Student Loans Affect Your Ratio
So how do student loans fit into this picture? The first thing to understand is that the amount you pay on your student loans each month counts toward your debt-to-income ratio.
In other words, adding other debts on top of your student loans will increase your debt-to-income ratio even more and become less qualified for certain financing options.
Of course, that means that taking on student debt also means that you will not be able to take on as much debt in the future. Depending on your situation, having too much student loan debt might keep you from being able to acquire a mortgage or an auto loan.
What About Student Loans in Forbearance or Deferment?
On the other hand, there are some exceptional cases in the world of student loans. Some people think that if student loans are in deferment or forbearance, they may not affect the debt-to-income ratio in any way.
However, even if you do not have to pay off your student loans for a certain number of months, your student loans will still affect your debt-to-income ratio.
Many financial institutions have devised specific responses to student loans in deferment or forbearance. If there is some reason that you do not need to make monthly payments on a debt, it is not obvious what amount your debt should contribute to your debt-to-income ratio.
As a result, some institutions have set arbitrary numbers that seem reasonable to them. Some institutions will look at 1% of your total loan balance. Others might look at about 0.5% of your total loan balance.
Either way, your student loan will end up contributing to your debt-to-income ratio in one way or another.
The only exceptions are if you only have 10 months’ worth of payments left to make or fewer. Or, if you will receive loan forgiveness at the end of your forbearance or deferment, that loan amount may also be excluded from your debt-to-income ratio.
Strategies to Lower Your Debt-to-Income Ratio
The most obvious way to lower your debt-to-income ratio is by paying off your debt. However, prioritizing small loan amounts, you can pay back completely can help lower your monthly payments. That can disproportionately decrease your debt-to-income ratio.
Depending on your situation, you might also want to consider refinancing your student loans. Many people never look into refinancing their loans because they do not know anything about it. However, that means that a lot of people are leaving a lot of value on the table without even realizing it.
Whether you want to protect your credit score or your debt-to-income ratio, refinancing your student loans is often worth at least considering.
Understand How Student Loans Can Affect Your Debt-to-Income Ratio
Most people don’t learn about the impacts of student loans until well into their college career or even after. Many people are still learning about how their student loans interact with their debt-to-income ratio and other financial metrics. The sooner you understand how your student loans will function, the better you can strategize to achieve the best outcome possible.
To learn more about managing student and mortgage loans and improving your finances, reach out and get in touch with us anytime!
At 7th Level Mortgage, we are an experienced team of mortgage professionals based out of New Jersey and serving the east coast from Pennsylvania to Florida, including Delaware and Maryland. We have won numerous awards for our excellent professional work and reputation with clients for being extremely diligent, accessible, and hands-on throughout the entire mortgage process.