Question

Kim Lee is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Kim is living at home and works in a shoe store, earning a gross income of $1250 per month. Her employer deducts a total of $170 for taxes from her monthly pay. Kim also pays $70 on credit card debt each month. The loan she needs for chiropractic school will cost an additional $170 per month.

Calculate her debt payments-to-income ratio with college loan. Don't forget to convert your answer to a percentage.

Make sure to include zeros and the period in your answer.

Round your answer to 2 decimal places. i.e. 20.12, 31.89, 10.02, 8.09, etc.

Answer 1

Net income is calculated as (Gross income - Taxes)
Here, gross income = $1250 per month
Taxes=$170
So, net income=$1250-$170=$1080

Given that, Kim pays $70 on credit card debt each month.
Loan she needs will cost an additional $170 per month
Total debt payments=$70+$170=$240

Total debt payments-to-income including the credit card debt and the loan=Debt payments/Net income

=$240/$1080=0.222222222 or 22.22% (rounded up to two decimal places)
When we consider only loan amount of $170 the debt to income ratio will be $170/$1080=0.157407407 or 15.74% (rounded up to two decimal places)