Kim 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 $1,230 per month. her employer deducts $165 for taxes from her monthly pay. kim also pays $134 on several credit card debts each month. the loan she needs for chiropractic school will cost an additional $172 per month. kim make her decision by calculating her debt payments-to-income ratio with and without the college loan. (remember the 20 percent rule.)

Debt to income ratio is all your debt payments divided by all the money you earn during a month. Generally you are considered to be in good financial shape when your debt to income ratio is less than 20%, if it's less than 10% it is even better.

Kim's gross income = $1,230 - $165 (taxes) = $1,065

Kim's total debt payments without new debt = $134 (credit card payments)

Kim's total debt payments including new debt = $134 + $172 (new debt) = $306

Kim's debt to income ration without new debt = $134 / $1,065 = 12.58%

Kim's debt to income ration with new debt = $306 / $1,065 = 28.73%

Currently Kim's debt to income ratio is only 12.58% which is very good, but if she takes the new loan then her ratio will increase to 28.73% which is extremely high and not prudent.

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