Sallie Mae Debt-to-Income Ratio
- DTI shows your ratio of gross income to repayment obligations.
- There are two ways to calculate DTI.
- Review your Sallie Mae contract to see if DTI is disclosed.
Sallie Mae is using my DTI as an excuse to not remove a co-signer. Is that legal?
I currently have a large private consolidation student loan with Sallie Mae. I consolidated my multiple private student loans three years ago to attain a manageable monthly payment. At the time, I required a co-signer to complete the process but was informed that I could apply to release my co-signer from the loan after 24 consecutive on-time payments in addition to meeting other credit eligibility requirements. One month ago, after more than 36 consecutive on-time monthly payments I applied to release my cosigner and was denied. Per the notification letter I received in the mail, I called Sallie Mae with a question I had regarding their decision. Although the letter listed multiple possible reasons for denial ranging from latency to the loan not being eligible for such an option, the ONLY reason marked was "debt to income ratio too high". After one hour on the phone with Sallie Mae's customer service department and speaking to four different employees including a "supervisor" the answer I was given to my question of "what is an acceptable ratio of debt to income" was: "your annual income must be equal to or above the total amount of your loan". I went to college and obtained a Bachelors in Interior Design which ended up costing me over $60,000 in private loans in addition to my government loans. Aside from the fact that the market tanked and I am no longer even employed in that field, when I was a practicing Interior Designer, I only made a salary equal to half my student loans. PLEASE TELL ME what I can do to get approval to release my cosigner. I do not feel I was given a legitimate reason nor explanation for that reason from Sallie Mae.
It seems unfair Sallie Mae would say you can remove a co-signer by meeting a certain condition, and then pull the rug out from under you by adding a second condition when you meet the first. Before I discuss your contract with Sallie Mae, let us look at the company’s excuse, namely your debt-to-income ratio.
Debt-to-Income Ratio Summary
Debt-to-Income ratio (DTI) is a comparison of your monthly gross income and your monthly repayment obligations to creditors. For example, if you bring home $2,000 each month and your debt payments total $500, your DTI would be 25%. When you apply for new credit, potential lenders look at your DTI to determine if you can afford your current debt payments, and if so, how much additional debt you can afford to repay. DTI is one of the most important factors considered by potential lenders, as it is a good indication of your ability to repay the new loan.
There are two types of DTI that most lenders take into consideration. The first is typically known as the front-end ratio, which accounts for a person’s housing costs. The housing costs include rent (for non-homeowners). For homeowners it would include the mortgage principal and interest payment, mortgage insurance (if applicable), property taxes, insurance, and (if applicable) homeowner’s association (HOA) fees. The second is usually considered the back-end ratio. This consists of all other debt payments such as unsecured debt, auto loans, student loans, legal judgments, child support, alimony, and all items covered in the front-end ratio.
Every lender determines its own guidelines regarding allowable DTI ratios for new loans. Generally speaking, a combined DTI over 55% is considered very risky, and could make obtaining a new loan difficult. Generally speaking, most consumers should keep their front-end debt-to-income ratio below about 29%, as a rule of thumb.
Sallie Mae’s Debt-to-Income Ratio Requirement
It is misleading for Sallie Mae to tell refinance customers that they can remove a co-signer if the customer makes 24 consecutive on-time payments. However, as you mentioned, it appears Sallie Mae stated that not only did you need to make 24 consecutive on-time payments, but there were other credit eligibility requirements you needed to reach before it would remove the co-signer. The question is, were those requirements disclosed to you when you signed the contract? Review the refinance contract you signed with Sallie Mae three years ago. Does the contract state you need a certain DTI to qualify to remove a co-signer? If so, what DTI must you have? Is the DTI front-end or back-end?
If the DTI requirements are stated clearly in the contract, then that is what you and Sallie Mae agreed to follow.
However, if the DTI requirements are not stated clearly or are not stated at all, then Sallie Mae's reason for denying you the ability to remove the co-signer is arbitrary and contrary to the terms and conditions of the contract. In that case, consult with an attorney in your state who has experience in contract law and litigation, and consider filing a lawsuit against Sallie Mae for breach of contract.
To learn more about negotiating with Sallie Mae, see the Bills.com resources Sallie Mae Loan Forbearance and Sallie Mae Loan Settlement, Sallie Mae Loans and Sallie Mae CoSigner Liability. To learn more about student loans, read the Bills.com resource Student Loan Payment.
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