Question

Madeline Rollins is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Madeline is living at home and works in a shoe store, earning a gross income of $820 per month. Her employer deducts a total of $145 for taxes from her monthly pay. Madeline also pays $95 on several credit card debts each month. The loan she needs for chiropractic school will cost an additional $120 per month. Help Madeline make her decision by calculating her debt payments-to-income ratio with and without the college loan. (Remember the 20 percent rule.)

Answer 1

Answer:

Conclusion: Madeline should not ask for the loan

1. With college loan:

• DTI  = 43.9%    

2. Without the college loan

• DTI = 29.3%

Explanation:

Calculate the DTI for both scenaries, with and without the college loan.

• DTI = (monthly debt payments) / (gross monthly income) × 100

                                            With college loan     W/O college loan

Monthly debt payments($)

• Taxes                                    145                              145

• Credit card                            90                                95

• College loan                        120                                  0

                 Sub-total                    360                              240

Montly gross income ($)             820                              820

1. With college loan:

• DTI  = (360/820)×100 = 43.9%    

2. Without the college loan

• DTI = (240/820)×100 = 29.3%

There are several rules to assess if a DTI is good or not.

Some of those rules include that:

• A DTI without mortage should be below 28%, thus 29.3% is slightly over the limit.

• A DTI with mortage should be below 43%, thus 43.9% is slightly over the lilmit.

• The 20% rule states that the debt without a mortage should be no more than 20 percent of the annual income after taxes.

Since the DTI is already higher than 20% the conclusion is that Madeline should not ask for the loan.