I recently tried to get a personal loan of a pretty small amount but was shit down by a high DTI. I don’t have many monthly payments but I do have a substantial amount of student loans, however, they don’t have a payment term yet as I’m still in school. How exactly do non-active student loans affect DTI?
—Patrick in Georgia
Andrew Pentis from Student Loan Hero responds…
The vast majority of college and graduate students put off payments on their education debt while they’re enrolled. Less time worrying about loan dues, the thinking goes, and more energy to work toward your degree. We don’t fault you for following the crowd, Patrick.
Whether you like it or not, however, your student loans are always actively gaining interest and appearing on your credit report, even when they’re deferred. Here are the details about how this impacts your debt-to-income ratio (DTI) as it relates to applying for additional credit, such as personal loans. If you’re ever unsure of where your creditworthiness stands, there are a variety of means to check your credit score without impacting it.
Are student loans ever really ‘inactive’?
When you borrow a student loan, your repayment technically begins immediately. Yes, you can defer monthly payments (typically while you’re at least enrolled half time), but interest still accrues and capitalizes onto your balance (except for Federal Direct Subsidized Loans). That’s why most students, after enjoying a postgraduate grace period, end up facing a larger balance than they originally borrowed.
Even when your loans are deferred, Patrick, they still have a repayment term.
- Federal loans are automatically tagged with the 10-year, Standard Repayment Plan upon borrowing.
- For private student loans, borrowers must choose or accept a repayment term upon finalizing a loan offer from their lender.
Your repayment term stays the same unless you change your repayment plan (for federal loans) or refinance your loans (for federal and private).
What about the administrative forbearance on federal loans during the COVID-19 pandemic?
Federal loan borrowers were able to pause their repayment without penalty, from March 2020 through January 2022, due to a temporary interest waiver awarded by the federal government. Current and former students enjoyed 0% interest on their loans during this period, but borrowers were slated to pick up where they left off in repayment on Feb. 1, 2022.
How do student loans impact your DTI?
Like credit card, auto, or personal loan debt, student loans are counted in the debt end of your DTI. As your student loans accrue and capitalized interest, your debt balance grows too.
Even if you’re deferring your loan dues, prospective lenders account for the monthly debt payments you could be making in the short term and absolutely will be making over the long term. A bank or credit union is evaluating whether you’ll be able to afford both your student and personal loan payments once their repayments overlap.
How does your DTI affect other loan applications?
So, while your student loans might feel inactive, Patrick, they’re very much an ‘active’ part of your ever-changing credit. When you applied for that low-dollar personal loan, your prospective lender saw the loans on your credit report and accounted for the eventual burden you’ll bear in repayment.
Of course, it’s still possible to improve your debt-to-income (DTI) ratio (and other factors that lenders care about, like credit score), and therefore better your next personal loan application. There are two main levers you can use to pull your DTI in the right direction:
- Decrease your debt: You might opt for in-school payments on your student loans to help decrease your total balance and get ahead of accruing interest. Paying off any high-interest debt, such as for credit cards, should be your top priority.
- Increase your income: Taking on part-time or summer jobs, perhaps even school year internships, could give you more cash to pay off debt on a faster timetable. With more money coming in every month, potential lenders will see you as a safer bet to repay your loans.
As you’re working to improve your DTI, check in with lenders about their specific underwriting requirements. You can then figure how far you are from gaining approval by employing a debt-to-income ratio calculator.
Even after you’ve improved your DTI to the point of personal loan approval, look beyond the numbers. Confirm that you have the finances – and the stomach – to afford both your student and personal loan payments when the time comes.
