Refinancing your student loans can help you save on interest costs and potentially lower your monthly payment. But if you’re considering refinancing, understanding how lenders evaluate your financial situation is essential.
Your credit score plays an important role, but it’s not the only factor lenders consider. Your debt-to-income ratio is another key metric that can significantly affect your refinancing approval and the interest rate you’ll qualify for.
What Is My Debt-to-Income Ratio?
Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward debt payments. Lenders use this ratio to assess whether you can comfortably afford to refinance. A lower ratio indicates you have more income available, which makes you a less risky borrower.
To calculate your DTI, lenders include your mortgage or rent payment, credit card minimum payments, auto loans, child support, alimony, personal loans, and other financial obligations. Your monthly gross income—your income before taxes—is the denominator.
As an example, let’s say you have a $1,300 mortgage payment, a $350 car loan payment, and a $600 student loan payment, totaling $2,250. If your gross monthly income is $4,000, your DTI is $2,250 ÷ $4,000 = 56%. This means more than half of your income is committed to debt payments, signaling limited cash flow.
How Your Debt-to-Income Ratio Impacts Refinancing
Most lenders prefer a ratio of 50% or lower to approve student loan refinancing applications. If your DTI exceeds 50%, you might still find lenders willing to work with you, but you’ll likely face higher interest rates. A high DTI can also limit your options.
The good news is that you can take steps to improve your ratio before applying for refinancing.
1. Increasing Your Income
Boosting your income directly improves your DTI. If you’re due for a performance review, it could be a good time to discuss a raise with your manager. Come prepared to talk about your contributions and the value you bring to your role.
If your employer offers overtime opportunities, taking advantage of them can provide additional income that improves your ratio. Even a modest increase in your monthly earnings can make a meaningful difference.
Some professionals also pursue certifications or additional training that qualify them for higher-paying positions within their field. While this strategy takes time, it can lead to long-term income growth that strengthens your overall financial profile.
2. Optimize Your Debt Repayment Strategy
Focus on an approach that works with your existing budget. For example, if you’re carrying high-interest credit card balances, paying those down before refinancing your student loans can improve your DTI and save you money on interest charges.
Another approach is to look at your debt payoff timeline. If one of your loans will be paid off in the next few months, waiting until that obligation is eliminated can improve your DTI without changing your payment strategy. For example, if your auto loan has only four payments remaining, your DTI will improve significantly once that $350 monthly payment disappears.
You might also consider refinancing other high-interest debts before tackling your student loans. Consolidating credit card debt through a personal loan at a lower interest rate can reduce your monthly minimum payments, which improves your DTI.
3. Apply with a Cosigner
If you’re unable to qualify on your own or want to access better interest rates, some lenders allow you to apply with a cosigner. A cosigner with strong credit and a healthy financial profile can improve your approval odds and help you secure a lower interest rate.
Just keep in mind that your cosigner is equally responsible for the debt, so this arrangement requires trust and clear communication.
Ready to Refinance?
Improving your debt-to-income ratio can give you access to more refinancing options and better interest rates. When you’re ready to explore refinancing, ELFI offers a transparent application process with personal loan advisors to guide you through each step.
Visit our Student Loan Refinancing Eligibility Requirements page to see what qualifications lenders typically look for or check out our Refinancing FAQs to get answers to common questions. You can also use our Student Loan Refinance Calculator to see how much you could potentially save.
Taking control of your finances by strategically managing debt and refinancing when the time is right can help you pay off your student loans faster and move toward a stronger financial future.
