Student Debt: 16% Will Have Debt-to-Income Ratio Above 20% at Graduation

LendEDU’s fourth annual Student Loan Debt by School by State report found that the average student loan borrower from the Class of 2018 left campus with $28,565 in debt.

For young Americans looking to attain a bachelor’s degree, it is quite likely they will need to take on student loan debt to achieve that milestone.

And, this is debt that likely won’t be paid off until borrowers are in their early 30s, commanding a significant portion of each paycheck.

Monthly debt payments relative to income is known as a debt-to-income (DTI) ratio. When evaluating a potential borrower’s personal finance situation, lenders will place heavy emphasis on DTI.

As a general rule of thumb, a DTI of 36% or less is considered “healthy.” Meanwhile, the Consumer Financial Protection Bureau suggests that the maximum acceptable DTI for most lenders is 43%.

According to new data provided exclusively to LendEDU from student loan lender Funding U, a meaningful proportion of current student loan borrowers will likely be flirting with a risky DTI just from student loan debt.

Funding U‘s data of nearly 10,000 pre-qualification student loan applications included what each borrower is expected to earn after graduating, how much student debt each is expected to graduate with, and the resulting monthly student debt payment for each borrower.

From this data, we were able to find the expected DTI at graduation for nearly 10,000 student loan borrowers.

When you consider that this DTI calculation didn’t even consider future debt payments related to mortgages, cars, or credit cards, the results are bleak.

16% of Student Loan Borrowers Will Likely Have a DTI Over 20% Just From Student Loans

Please note that the following table only shows a sample of the data we analyzed. You can see five cases of very low projected DTI ratios, five that were right in the middle, and five that were towards the higher end.

The table above was used to give you an idea of the dataset that was analyzed for this report. That dataset had nearly 10,000 pre-qualification applicants that allowed us to uncover the following trends:

 _{The above statistics derive from proprietary data provided to LendEDU by student loan lender Funding U. DTI ratios for nearly 10,000 pre-qualification applications for private student loans were calculated by Funding U using metrics like projected first year salary, projected student loan debt upon graduating, and projected monthly student loan debt payments.} 

While the average projected DTI for nearly 10,000 college students was 12.95%, the proportion of borrowers that are walking a fine DTI line is quite concerning.

Nearly 16% of private student loan applicants have a projected DTI over 20% upon graduating from college, and this ratio does not even consider other debt payments that are sure to come upon joining the workforce.

For example, if 20% or more of your monthly income is going towards monthly student loan payments, then imagine how high the DTI would be when you consider monthly credit card, mortgage, and automobile payments.

Many these young Americans will likely be looking at a DTI over the “healthy” threshold of 36%, while also likely approaching or exceeding a DTI of 43%, which is considered the “no-fly zone” for lenders during the approval process.

Even average student loan borrowers, whose DTI is around 13%, are leaving little leeway for their debt to grow beyond just student loan payments.

The findings from this dataset depict the overwhelming burden of student loan debt faced by so many young Americans. With these payments already taking up a good chunk of their monthly income, many borrowers look like dangerous propositions in the eyes of lenders and will struggle to secure financing in the future.

A Guide to Maintaining Your Debt-to-Income Ratio As It Relates to Student Loan Debt

Using starting median salary projections provided by Funding U for 325 different majors, LendEDU has put together a table that shows what you can pay each month towards your student loan debt to maintain a certain DTI according to how much you are making each month due to your major.

As you can see from the table, majors like petroleum engineering, that often lead to high-paying jobs, allow for much more flexibility in monthly student loan payments when trying to maintain a healthy DTI from just student loans.

For example, a petroleum engineering major that makes $96,700 out of college can make a monthly student debt payment of $402.92 and still maintain a very healthy DTI of 5% from just student loan debt.

But, if an early childhood education major making $30,700 out of college makes a monthly student loan payment of $402.92, than he or she is looking at a more shaky DTI of nearly 16% from just student loan debt.

For reference, student loan lenders often see a projected DTI of 15% as “acceptable,” while a ratio of 20% is seen as approaching the “dangerous” territory.

The purpose of the above table is to give both current and prospective college students a good sense of what they can manage in monthly student loan payments without creating a DTI that is going to lead to a poor personal finance situation, while also limiting their appeal to mortgage lenders or credit card companies.

Armed with this information, students can take steps to align their debt and income in a number of ways – choices like living on or off campus, enrolling for 15 credit hours every semester, attending community college then transferring to a 4-year institution, adding a second major or minor that could provide an income back-up or boost, and utilizing the federal programs available upon graduation such as income-based payment structures – can be dramatic, positive influences on DTI.

Also, research the earnings of alumni from your school because schools with strong networks and career placement resources usually give an earnings boost across all majors.

Jeannie Tarkenton, Founder & CEO of Funding U

With an idea of how much student loan borrowers can afford to pay each month towards their debt to maintain a healthy DTI, they can then hopefully get a clearer picture of how much student loan debt they should be taking on in the first place. This could mean going to a less expensive school or a school that is providing more money in scholarships and grants.

Ultimately, maintaining a healthy DTI to open yourself to more desirable credit card offerings or mortgage rates after graduating college should be the goal if you are looking to live a comfortable financial life, and it starts with limiting student loan debt.

Informed students and their families can safely use loans to finance a college degree – in the major of their choice – and to gain entrée to their chosen career. But just like a car loan, a mortgage, or a credit card, you need to budget with real numbers to understand the cost/benefit of the loan and the degree attained. DTI can and should be in your control.

Jeannie Tarkenton, Founder & CEO of Funding U

Methodology

All data that was found in this report comes from exclusive data provided by student loan lender Funding U to LendEDU for analysis. The data features nearly 10,000 pre-qualification applications from consumers applying for private student loans.

In this report, DTI is a metric representing a borrower’s ability to repay interest and principal after graduation. Future income levels are determined using major and school statistics, while the projected debt at graduation is calculated using highly granular behavioral characteristics, such as individual debt taken for each credit hour completed.

Author: Mike Brown

In his role at LendEDU, Mike uses data, usually from surveys and publicly-available resources, to identify emerging personal finance trends and tell unique stories. Mike’s work, featured in major outlets like The Wall Street Journal and The Washington Post, provides consumers with a personal finance measuring stick and can help them make informed finance decisions.

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