The 1% Rule Is Outdated: A Better Way to Calculate Student Loans in DTI

Lenders: You could be disqualifying 20%+ of potential borrowers without even knowing it.
Especially in today’s high-rate, low-margin lending environment, every approval counts. Yet many credit unions and depositories are still relying on outdated underwriting rules—like applying 1% of a student loan balance to calculate DTI—even when borrowers are on income-driven repayment (IDR) plans or in deferment. The result? You’re turning away creditworthy, income-earning customers… who are shopping elsewhere.

🎥 Watch the full video about this topic here
We break down why student loan debt is misunderstood in underwriting—and how to fix it.

The Student Loan Blind Spot in Lending

At LoanSense, we’ve worked with numerous lending institutions and noticed a troubling pattern:

Lenders default to using 1% of the student loan balance to calculate debt-to-income (DTI), even when borrowers are in forbearance, deferment, or on income-driven repayment plans.

This “instant underwriting” approach may feel efficient, but it often results in inaccurate DTI ratios that automatically flag borrowers as high-risk—when in reality, they are perfectly qualified.

Real Impact: Declining Educated Borrowers With Income Potential

“More than 62–78% of consumer loan applicants at depositories we partner with have student loan debt. And many of them are declined not because they can’t afford the loan—but because lenders are misreading their debt situation.”

Even worse, 50%+ of borrowers graduate with more debt than income, especially those with graduate or non-traditional education paths. And it’s exactly during this transitional phase that they seek auto or personal loans to build credit.

Why This Matters for Your Bottom Line

• You’re losing revenue by declining borrowers you could be serving.
  
• Dealers often send out multiple lender bids. If you're using 1% while others leverage smarter student loan assessments, you lose the deal.
  
• You’re missing out on building long-term relationships with younger, credit-building customers—your future mortgage and investment clients.
  
  

There’s a Simple Solution—No Manual Review Required

LoanSense offers an API solution that integrates directly into your underwriting process to:

✅ Instantly verify and estimate actual student loan payments
✅ Adjust DTI calculations based on real-time payment data
✅ Reduce adverse actions and increase approvals
✅ Seamlessly collect borrower documentation if needed

Request a Demo of the LoanSense API

Elevate the Lending Experience for Millennials & Gen Z

These borrowers don’t just want approvals—they want understanding. And when they’ve been declined by three other lenders, your ability to say “yes” (with confidence) makes all the difference.

By working with LoanSense, you can also:

• Receive insight into borrower goals like future home purchases
  
• Cross-sell retirement, insurance, and savings products
  
• Build trust and loyalty with younger generations
  
  

Next Step: Stop Losing Qualified Borrowers

Lenders who modernize how they assess student loan debt gain a competitive edge. Our partners report increased approval rates, improved customer satisfaction, and more holistic client relationships.

📅 Book a call with our sales team now to see how simple it is to update your policies without slowing down your process.