Student Loans: Understanding the Debt-to-Income Ratio

When you apply for student loans, the maximum amount you will be provided depends in part on how many other debts you have. In fact, these debts are compared to the total income you list on your application. You must be able to show your debt-to-income ratio is low enough that you can afford taking on a new loan.

Debt-to-Income Calculation

You can calculate your debt-to-income ratio by dividing your monthly debt payments by your monthly income. The result should be a ratio under 33 percent preferably. To prevent bankruptcy, financial advisers recommend never taking on a debt-to-income ratio over 50 percent. In order to take a new loan, it is best to have a ratio over 10 percent.

Determining Your Limits

You may be approved for a loan even if your debt-to-income ratio is higher than 10 percent. However, the lender will not extend you a large amount of financing. Instead, the lender will give you only what they have deemed you can afford. In order to increase the limits available to you, try paying down as much of your other debts as possible before seeking your new loan. This is a good policy with any new loan, including auto debts and mortgages.

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