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Your debt-to-income ratio is a measure of how much you owe tracks against how much you take in. This figure is frequently used by lenders to evaluate how creditworthy an applicant is, or how likely they are to be able to pay their debt back on time. It also helps lenders determine what interest rate to charge borrowers.

A low DTI ratio demonstrates that there is probably sufficient income to pay debts and take on more. Typically, a DTI should be no more than 36% to obtain favorable credit. Here, learn more about what DTI is and how to calculate yours.

First, a Debt-to-Income Ratio Refresher

In case you don’t know how to calculate the percentage or have forgotten, here’s how it works.

DTI = monthly debts / gross monthly income

Say your monthly debt payments are as follows:

•   Auto loan: $400

•   Student loans: $300

•   Credit cards: $300

•   Mortgage payment: $1,300

That’s $2,300 in monthly obligations. Now, say gross monthly income is $7,000.

$2,300 / $7,000 = 0.328

Multiply the result by 100 for a DTI ratio of nearly 33%, meaning 33% of this person’s gross monthly income goes toward debt repayment.

💡 Quick Tip: Wherever you stand on the proposed Trump credit card interest cap, one of the best strategies to pay down high-interest credit card debt is to secure a lower interest rate. A SoFi personal loan for credit card debt can provide a cheaper, faster, and predictable way to pay off debt.

What Is Considered a Good DTI?

The federal Consumer Financial Protection Bureau advises homeowners to consider maintaining a DTI ratio of 36% or less and for renters to consider keeping a DTI ratio of 15% to 20% or less (rent is not included in this ratio).

In general, mortgage lenders like to see a DTI ratio of no more than 36%, though that is not necessarily the maximum.

For instance, DTI limits can change based on whether or not you are considering a qualified or nonqualified mortgage. A qualified mortgage is a home loan with more stable features and without risky features like interest-only payments. Qualified mortgages limit how high your DTI ratio can be.

A nonqualified mortgage loan is not inherently high-risk or subprime. It is simply a loan that doesn’t fit into the complex rules associated with a qualified mortgage.

Nonqualified mortgages can be helpful for borrowers in unusual circumstances, such as having been self-employed for less than two years. A lender may make an exception if you have a high DTI ratio as long as, for example, you have a lot of cash reserves.

In general, borrowers looking for a qualified mortgage can expect lenders to require a DTI of 43% or less.

Under certain criteria, a maximum allowable DTI ratio can be as high as 50%. Fannie Mae’s maximum DTI ratio is 36% for manually underwritten loans, but the affordable-lending promoter will allow a 45% DTI ratio if a borrower meets credit score and reserve requirements, and up to 50% for loans issued through automated underwriting.

In the market for a personal loan? Some lenders may allow a high DTI ratio because a common use of personal loans is credit card debt consolidation. But most lenders will want to be sure that you are gainfully employed and have sufficient income to repay the loan.

Front End vs Back End

Some mortgage lenders like to break a number into front-end and back-end DTI (28/36, for instance). The top number represents the front-end ratio, and the bottom number is the back-end ratio.

A front-end ratio, also known as the housing ratio, takes into account housing costs or potential housing costs.

A back-end ratio is more comprehensive. It includes all current recurring debt payments and housing expenses.

Lenders typically look for a front-end ratio of 28% tops, and a back-end ratio no higher than 36%, though they may accept higher ratios if an applicant’s credit score, savings, and down payment are robust.

How Can I Lower My Debt-to-Income Ratio?

So what do you do if the number you’ve calculated isn’t your ideal? There are two ways to lower your DTI ratio: Increase your income, or decrease your debt.

Working overtime, starting a side hustle, getting a new job, or asking for a raise are all good options to boost income.

Strangely enough, if you choose to tackle your debt by only increasing your payments each month, it can have a negative effect on your DTI ratio. Instead, it can be a good idea to consider ways to reduce your outstanding debt altogether.

The best-known debt reduction plans (or payoff plans) are likely the snowball and avalanche methods, but there’s also the fireball method, which combines both strategies.

If credit card debt is an issue, here’s a tip: Instead of canceling a credit card, it might be better to cut it up or hide it. In the world of credit, established credit in good standing is looked upon more favorably than new. Eliminating a long-standing line of credit can lower your score.

Another way to decrease your debt could be to get a debt consolidation loan or credit card consolidation loan. This is a kind of personal loan, hopefully at a lower interest rate than your credit card offers. If so, it can save you on interest and give you just one simple loan to pay every month.

These personal loans are typically offered with a fixed interest rate and a term of one to seven years.

Recommended: How to Apply for a Personal Loan

The Takeaway

Your debt-to-income ratio matters because it affects your ability to borrow money and the interest rate for doing so. In general, lenders look at a lower DTI ratio (say, 28% to 36% maximum in some situations) as favorable, but sometimes there’s wiggle room. If you are struggling with high-interest debt, such as credit card debt, paying it off can positively impact your DTI. There are methods such as the debt snowball method, the debt avalanche technique, or taking out a personal loan.

Whether or not you agree that credit card interest rates should be capped, one thing is undeniable: Credit cards are keeping people in debt because the math is stacked against you. If you’re carrying a balance of $5,000 or more on a high-interest credit card, consider a SoFi Personal Loan instead. SoFi offers lower fixed rates and same-day funding for qualified applicants. See your rate in minutes.

FAQ

How do you calculate DTI?

To calculate your debt-to-income ratio, or DTI, divide your total monthly debt payments by your gross monthly income, then multiply that figure by 100 to get the percentage.

What is a good DTI?

What is considered a good DTI can vary along with the type of credit you are trying to secure. In some cases, a figure between 28% and 36% is considered on target, but in others, a ratio of 50% could be acceptable. Talk to your potential lenders to learn more.

What is the 28-36 rule?

The 28/36 rule is a guideline used regarding mortgages to determine how much a borrower can afford to spend on housing and overall debt. The rule says that a borrower should spend no more than 28% of their gross monthly income on housing (mortgage, property taxes, insurance) and a maximum of 36% on all debts (including housing). This is one way lenders may evaluate a prospective borrower’s creditworthiness.

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SOPL-Q225-104

You may have noticed when shopping around for student loans that some lenders display an interest rate, while others show an APR. What’s the difference? The main distinction is that the student loan APR (which stands for annual percentage rate) includes any fees or other charges the lender may add to the loan principal. The “interest rate” does not.

When shopping for a student loan, it’s key to know whether you’re looking at an APR or an interest rate, since this can have a significant impact on the total cost of the loan. Read on to learn more about student loan APR vs. interest rate, what each number includes, and how to compare student loan rates accurately to find the best deal.

How Do Student Loan Interest Rates Work?

As with any loan, the interest rate represents the amount your lender is charging you to borrow money. It’s expressed as a percentage of your loan amount (or the loan principal) and doesn’t reflect any fees or other charges that might be connected to your loan. Interest rates can be fixed (the same for the life of the loan) or variable (may fluctuate over the life of the loan).

One of the factors that affect student loan interest rates is the type of student loan it is. Interest rates work differently depending on whether a student loan is federal or private. Congress sets the interest rates for federal student loans. The rate is fixed — and it’s the same for all borrowers. The federal student loan interest rate for undergraduates is 6.39% for new loans taken out for the 2025-26 school year, effective from July 1, 2025 to July 1, 2026.

The interest rate for private student loans works differently. Private lenders set their own rates, which may be higher or lower than rates for federal loans. Interest rates on private loans may be fixed or variable and typically depend on the creditworthiness of the borrower (or the student loan cosigner, if there is one). Those with higher credit scores generally qualify for lower rates, while borrowers with lower credit scores tend to get higher rates.

What Is the Student Loan APR, and How Is It Different From Interest Rate?

A loan’s annual percentage rate (APR) represents a more comprehensive view of what you’re being charged. It tells you the total cost of the loan per year, including any upfront fees, such as an origination fee, which a lender may charge for processing the loan. Because of that, a loan’s APR may be higher than its interest rate.

Looking at the APR helps you compare different loan offers and get a real picture of the overall cost you will pay for borrowing money for your education. If a loan doesn’t have any fees, the interest and the APR will be the same.

Federal student loans publish interest rates but not the APRs, so it’s important to keep in mind that the interest rate of a federal student loan is not the total cost of that loan. These loans also charge an origination fee, which is 1.057% for Direct Subsidized and Direct Unsubsidized loans, and 4.228% for Direct PLUS loans (unsubsidized loans for parents and graduate/professional students).

For private student loans, origination fees vary by lender. While some private lenders charge origination fees, it’s possible to find private loans that don’t have these fees.

However, it’s important to keep in mind that private student loans generally don’t come with the same protections as federal student loans, such as income-driven repayment plans and forgiveness programs.

What Fees / Charges Might Be Included in a Student Loan APR?

Fees that may be included in a student loan APR are upfront fees, such as origination fees. Other factors that could impact your loan balance — but are not included in the loan’s APR — are interest capitalization and late fees for missed payments.

Here’s how each of these things plays a role in student loans.

Origination Fees

The most common fee for student loans is the loan origination fee for processing the loan. Whether the loan is federal or private, this fee is typically based on a percentage of the total loan amount and will be deducted from your loan amount before the loan is dispersed. This means that if you borrow $10,000 and the origination fee is 1.057%, $105.70 will be deducted from your total loan amount — so you would actually receive $9,894.30 for the year.

While origination fees can be small, the cost can add up. Because these fees are deducted from the total loan amount, you are paying the fee with borrowed money and you’ll pay interest on the fee paid.

Capitalized Interest

Accruing interest and capitalized interest may affect the cost of your loan. Most student loans begin accruing interest daily as soon as they are disbursed. The exception is federal Direct Subsidized Loans, which the government covers the interest on until you are required to start making payments. That’s one of the major differences between subsidized vs. unsubsidized loans: For unsubsidized loans, the interest continues to accrue, increasing the amount the borrower will need to repay.

In addition, in certain situations, including deferment and during the six-month grace period after graduation, unpaid interest on your federal student loans may capitalize. That means the interest is added to your principal balance, and you’re charged interest on the new higher amount. Capitalization can increase the total balance of your loan.

Private lenders may have other or different situations when interest on student loans capitalizes, so it’s important to find this out when reviewing loan offers.

Late Payment or Returned Payment Fees

Both private and federal student loans may also have late fees and returned payment (or insufficient funds) fees, both of which add to the total amount you must repay. However, you can avoid these fees by always paying your bill on time and making sure you have enough money in your bank account to cover the payment.

Fees vary widely from one lender to the next, and some private lenders may not charge any fees.

Recommended: Average Student Loan Interest Rate

If a Loan’s Interest Rate and APR Are the Same, Does That Mean There Are No Hidden Fees?

Typically, if a student loan’s interest rate and APR are the same, it means there are no hidden fees. However, there are still a few things to watch out for that could affect the cost of your loan.

What to Look for in the Loan Agreement

Be sure to carefully read the loan agreement for your student loan. The agreement should spell out the loan’s interest rate and any upfront fees such as an origination fee.

Keep in mind that interest rates published for federal student loans are not APRs and do not include the origination fee. This fee will come out of the amount of money that is disbursed (paid out) to you while you’re in school.

The student loan APRs listed by private lenders include any additional upfront charges and fees. If the lender doesn’t charge any fees, the APR and interest rate will be the same.

Finally, check the loan agreement to see in what situations interest might capitalize and increase the overall cost of a loan.

Why Some Fees May Still Apply

A student loan may come with other fees, such as late fees for missed or late payments, and returned payment fees if a borrower doesn’t have enough money in their bank account to cover their loan payment. Other fees might include collection fees if a borrower defaults on a loan and the loan goes to collection.

When Shopping for a Loan, Should I Look at Interest Rate, APR, or Both?

As you’re shopping for a student loan, it’s important to look at the APR, if it’s available, as well as the interest rate, to get an accurate picture of what the loan will cost you.

Understanding the Full Cost of Borrowing

Because it includes interest and any fees, a loan’s APR tells the true cost of the loan, so that a borrower will know what the full cost of borrowing the money is. If you only look at the interest rate, you won’t be able to factor in any fees that the loan might come with.

Once you know what a loan will cost you in full, you can calculate student loan payments to determine what your monthly payments might be.

How to Compare Lenders Accurately

Whenever possible, you’ll want to look at the APR of a student loan, since this number allows a more apples-to-apples comparison of loan costs. The APR reflects both the loans interest rates and fees. If you just compare straight interest rates, you can miss the big picture in terms of the total cost of the loan. Sometimes those additional fees can make a big impact.

How APR and Interest Rates Affect Student Loan Repayment Over Time

A loan’s repayment amount — both the monthly payments and the total cost of the loan over time — are significantly impacted by a loan’s APR and interest rate.

Impact on Monthly Payments

A student loan’s interest rate and APR can affect student loan repayment over time in the following ways:

•   The percentage: A higher interest rate or APR means a higher monthly payment, and a lower rate means a lower payment.

•   How interest accrues: Although the interest rate is the same for federal Direct Subsidized and Direct Unsubsidized loans, the latter loan ends up costing significantly more because interest starts accruing from the time the funds are disbursed. With subsidized federal loans, the interest does not accrue while you are still in school.

For private student loans, interest typically begins to accrue as soon as the loan money is disbursed to your school. The longer interest accrues, the higher your monthly payments may be.

•   When interest capitalizes: In certain situations, unpaid interest on your student loans may capitalize and be added to your principal balance. That can increase monthly student loan payments as well as the overall cost of the loan.

Total Repayment Cost Over Loan Term

Your APR can determine the total cost of your loan over time. The higher the APY, the more interest that will accrue on the loan, and the more interest you’ll pay over time. That can lead to a higher overall cost of your loan over the term.

To reduce your payments, and potentially lower the total cost of your loan, one option some borrowers may want to consider is refinancing student loans. With student loan refinancing, you exchange your current loan for a new loan from a private lender with new rates and terms. Ideally, if you qualify, the interest rate on the new loan will be lower.

A student loan refinancing calculator can help you figure out how much refinancing might save you.

You can shop around for student loan refinancing rates to look for the best offer. Just be aware that refinancing federal student loans makes them ineligible for federal benefits like forgiveness, deferment, and income-driven repayment plans.

The Takeaway

A student loan’s interest rate is the cost of borrowing money and is expressed as a percentage of the loan amount. APR includes the interest rate as well as the additional costs and fees associated with borrowing. As a result, it gives you a more complete picture of the total cost of the loan.

Understanding APR vs. interest rate is important when you’re researching best rates for student loans. It will help you make informed decisions that may lower your cost of borrowing. Another option for potentially lowering your payments is through refinancing, if you qualify for a lower interest rate.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

What is a good APR for a student loan?

For new loans taken out for the 2025-26 school year, the federal student loan interest rate is 6.39% for undergraduates (whether the loan is unsubsidized or subsidized). For graduate students it’s 7.94%, and for parents it’s 8.94%. Average private student loan annual percentage rates (APRs) vary by lender. They range from 3.18% to 17.99%, as of January 2026, depending on a borrower’s credit.

Is APR better than interest rate?

The annual percentage rate (APR) gives you a more accurate picture of the true cost of financing. The APR of a loan tells you how much you will pay for a loan over the course of a year after accounting for the interest rate as well as any extra costs, like origination fees. When comparing loan offers, it’s generally better to compare APRs than interest rates, since this allows you to compare loan offers apples to apples.

Can APR and interest rate be the same?

Yes. If no fees are added to your loan amount, the interest rate and the annual percentage rate (APR) will typically be the same.

Why does APR matter when refinancing student loans?

APR gives you the total cost of borrowing, including any upfront fees you’ll incur when refinancing. It provides the true and total cost of borrowing, and it gives you a way to compare loan offers accurately.

How can I lower the APR on my student loans?

One option for lowering the APR on student loans is with student loan refinancing. When you refinance, you replace your existing student loans with a new loan that has new rates and terms. If your credit is strong, you may qualify for a lower interest rate, which would lower your APR.

If you have federal loans and you want to keep them because of the federal benefits they come with, enrolling in auto pay can give you a $0.25% discount on your loan’s interest rate.

About the author

Julia Califano

Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.