USDA Student Loan Guidelines

Student loan debt is one of the most common financial challenges for first-time homebuyers. The good news is that USDA loans offer flexible student loan guidelines that can make homeownership possible even if you still owe on your education.

As long as you follow certain guidelines, a USDA loan can be a great tool to help recent graduates acquire their first home. Let’s explore how lenders consider student loan debt when reviewing your USDA loan eligibility.

USDA Student Loan Calculation

What matters most is your monthly student loan payment, not the total amount you owe. USDA lenders focus on how your required payment impacts your overall debt-to-income (DTI) ratio, rather than the size of your student loan balance.

Your DTI ratio is how a lender measures your ability to manage monthly payments. It compares your total monthly debt to your gross (before tax) monthly income.

Here’s what DTI measures:

• Housing costs (PITIA): Principal, interest, taxes, and insurance. This shows the percentage of your income that goes toward monthly housing expenses. Lenders calculate PITIA based on the payment for the home you’re planning to buy.
  

• Other monthly debts: DTI also includes major recurring debts such as student loans, car payments, personal loans, and credit card minimum payments. Everyday expenses like utilities, phone bills, and most insurance premiums are not included.

USDA loans do not have an official debt-to-income ratio limit, however, it is rare for borrowers above 44% DTI to qualify.

How Student Loan Status Impacts USDA Loan Approval

Student Loans In Repayment

If your student loans are in repayment, USDA lenders will use your documented monthly payment, as long as that payment is greater than $0. This includes borrowers on income-driven repayment (IDR) plans, even if the required payment is significantly lower than what would be calculated based on the loan balance.

For example, a borrower with a high student loan balance may still qualify if their income-based repayment plan requires a manageable monthly payment, since that payment is what’s included in the DTI calculation.

Student Loans Not In Repayment

If your student loans are not currently in repayment, USDA guidelines require lenders to include a calculated payment equal to 0.5% of the outstanding loan balance when determining your DTI.

For example, if you have a $30,000 student loan balance that is not in repayment, the lender would count a $150 monthly payment (0.5% of $30,000) toward your debts, even if no payment is currently due.

This approach ensures the loan application reflects a realistic future obligation once repayment begins.

Student Loans In Default

Loans in default must be brought back into “good standing” before you can be approved.

This can be done through:

• Loan rehabilitation: Making a series of agreed-upon payments to remove default status.
  

• Loan consolidation: Combining multiple loans into one new repayment plan.

Once your loans are current, you can move forward with your USDA loan application.

Bottom Line

Ultimately, student loans are just a part of your total DTI ratio. USDA loans don’t have a strict DTI ratio cutoff. Instead, lenders review your complete profile, including income, credit, and repayment history, to determine whether you can manage a mortgage alongside your other obligations.  

If you’re curious whether your student loans or current DTI might affect your eligibility, reach out to a Neighbors Bank USDA loan expert. They can review your situation and help you understand your options.