How student loan debt impacts your debt-to-income ratio

Student loans don’t automatically disqualify you from getting approved for a mortgage or auto loan—but they can impact how much you’re able to borrow, and on what terms. Let’s break down how student loans influence your borrowing power—or, your appeal to lenders.

The good news is, it is certainly possible to get a mortgage when you’re still paying off student loans, or make other large purchases. But, student loans do significantly influence your borrowing power, so it’s important to understand the role your loans and repayment habits play in your ability to access financing, and what strategies you can take to increase your borrowing power. 

Two key factors lenders assess most closely are your debt-to-income ratio (DTI) and credit score—and your DTI is likely the bigger hurdle if you have large amounts of student debt. Lenders view high DTIs as a red flag, often requiring ratios below 43% for approval on major loans. This threshold can become challenging if your student loan payments consume a substantial portion of your monthly income. Understanding how your student loans factor into this critical financial metric empowers you to make strategic decisions about refinancing, income-driven repayment plans, or accelerated payoff strategies to improve your borrowing power

Understanding your debt-to-income ratio 

Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes towards paying off debt. To calculate DTI, you divide your total monthly debt payments by your pre-tax monthly income. For example, if you earn $6,000 per month and pay $2,000 per month toward paying off loans and other debts, your DTI is 33%—or $2,000 / $6,000.* (You can quickly determine your debt-to-income ratio with Earnest’s DTI calculator.) *Example listed above is for illustrative purposes only.

How your student loans factor into your DTI

Student loan payments will directly increase your DTI, just like any other type of debt. Even if your loans are in deferment or forbearance, many lenders will still include those loans when calculating your DTI by factoring in a percentage of that loan’s total balance. 

What is considered a good DTI?

Lenders typically prefer a DTI below 36%, as it indicates you can manage additional debt responsibly. You can likely still qualify with a DTI between 36% and 43%, though potentially with less favorable terms.

Understanding your credit score 

Your credit score, a numerical representation of your creditworthiness, is another crucial factor. It's based on payment history, credit utilization, credit history length, and credit mix. Your payment history may be the most crucial factor in your credit score though—it accounts for 35% of your FICO credit score—which is good news for borrowers who make consistent, timely payments.

How your student loans impact your credit score

Student loans can either boost or hinder your score. Responsible payments signal reliability, while late payments or defaults do the opposite.

What is considered a good credit score?

There are two primary credit score models—the FICO score and the VantageScore, whose ranges differ slightly. A credit score around 800 or higher on either model will likely qualify you for better rates, whereas a credit score that falls below what’s considered “fair” (a FICO score below 580, or a VantageScore below 600) will make it difficult to secure a new loan. You can learn even more about credit scores with Earnest’s guide to credit score ranges. For reference, the average FICO score in 2024 was 715.

Strategies to strengthen your borrowing power:

Whether you’re looking to lower your DTI, raise your credit score, or both, there are a handful of key actions you can take to put yourself in a better position to secure a loan for a major purchase.

• Paying off some of your existing debt can help lower your DTI, showing lenders you’re ready to take on more credit.

• Refinancing existing student loans may help lower your monthly payments (and your interest rates), also lowering your DTI.

• Focusing on making consistent, on-time payments to any existing lines of credit ahead of applying for a loan can help increase your credit score. Or, explore additional strategies to strengthen your credit score.

• Saving for your down payment—whether that be a car, house, or something else—will reduce the amount you need to borrow, which can also make it easier to secure financing. 

While student loans influence your borrowing power, proactive financial management can ensure you maintain a healthy DTI and credit score. If you’re looking to improve your DTI, exploring student loan refinancing¹ may be beneficial, as it can lead to lower monthly payments², which ultimately lowers the percentage of your income that goes towards debt. To see if refinancing might be right for you, check your personalized rate with Earnest—it takes just a few minutes and won’t impact your credit score.

This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1 Please note that you will lose benefits associated with your underlying federal loans, such as federal Income-driven Repayment Plans (an example of which is the SAVE plan), Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options, if you refinance into a private loan. If you file for bankruptcy, you may still be required to pay back this loan.

2 Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for the total cost of your refinanced loan.