# 4. Calculating the Debt Payments-to-Income Ratio. Kim is trying to decide whether she can afford a loan she needs in orderto go to chiropractic school. Right now Kim is living at home and works in a shoe store, earning a gross income of\$820 per month. Her employer deducts \$145 for taxes from her monthly pay. Kim also pays \$95 on several credit card debtseach month. The loan she needs for chiropractic school will cost an additional \$120 per month. Help Kim make her decisionby calculating her debt payments-to-income ratio with and without the college loan. (Remember the 20 percent rule.)LO6-3

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Chapter 6

Practice Problem #4

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Step 1

Debt payment to income ratio is an indicator of what proportion of net income is the debt obligation.

This ratio is calculated as = Debt payments obligation / Net income where Net income = Gross income - taxes

Step 2

Net income = 820 - 145 = 675

Hence, Debt payment to income ratio with the college loan = (95 + 120) / 675 = 0.3185 = 31.85%

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