The more informed you are about student loans, the better equipped you’ll be to borrow responsibly. A core concept of lending is the debt-to-income (DTI) ratio – a simple metric that quickly illustrates your financial health.
Expressed as a percentage, your DTI ratio quantifies the proportion of your earnings that goes towards paying off debts each month. The equation is very straightforward:
Your “Total Monthly Debt Payments” (the numerator in the equation) includes all monthly debt obligations – this is the amount you owe each month on any borrowed money. This could be:
Your “Gross Monthly Income” (the denominator in the equation), is your total monthly income. If you’re still considered financially dependent on your parents and they are co-signing your loan, their income may be included in the DTI ratio when you’re taking out the loans. If not, your gross monthly income is the amount you earn monthly from all sources (employment, interest, etc.) before taxes or other deductions.
After plugging your numbers into the DTI equation, you’ll get a percentage. For example, if your total monthly debt payments total $200 and your gross monthly income is $1000:
A lower DTI ratio indicates a healthier financial situation, because you have a smaller chunk of your earnings going toward debt payments.
Knowing and understanding your DTI ratio can help you assess your student loan options:
Understanding the DTI ratio takes you one step closer to long-term financial health. By taking your DTI into consideration early in your college journey, you’ll be better equipped to borrow responsibly – keeping any debt at a manageable level. Your future self will thank you.
1 Investopedia. (2023, May 07). What's Considered to Be a Good Debt-to-Income (DTI) Ratio?
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