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 $1,050 per month. Her employer deducts $147 for taxes from her monthly pay. Kim also pays $181 on several credit card debts each month. The loan she needs for chiropractic school will cost an additional $170 per month. Help Kim make her decision by calculating her debt payments–to–income ratio with and without the college loan. (Remember the 20 percent rule.) (Enter your answers as a percent rounded to 2 decimal places.)

Answer 1

Net income = Gross income - Taxes = $1,050 - $147 = $903

Current debt plus college loan:

Debt payments-to-income ratio = Debt payments / Net income = ($181 + $170) / $903 = 0.3887, or 38.87%

Current debt without college loan:

Debt payments-to-income ratio = Debt payments / Net income = $181 / $903 = 0.2004, or 20.04%

If Kim adds the college debt to her current credit card debt, her debt payments-to-income ratio will exceed the recommended 20 percent limit. However, if Kim can pay off her credit card debt, then the college loan is affordable as seen here:

College loan only:

Debt payments-to-income ratio = Debt payments / Net income = $170 / $903 = 0.1883, or 18.83%