Question

Do the Math 6-3
A Recent Graduate’s Debt Status

Chelsea Menken, of Providence, Rhode Island, recently graduated with a degree in food science and now works for a major consumer foods company earning $70,000 per year with about $57,600 in take-home pay. She rents an apartment for $1,100 per month. While in school, she accumulated about $38,000 in student loan debt on which she pays $385 per month. During her last fall semester in school, she had an internship in a city about 100 miles from her campus. She used her credit card for her extra expenses and has a current debt on the account of $7,000. She has been making the minimum payments on the account of about $240 a month. She has assets of $14,000.

1. Calculate Chelsea’s debt payments-to-disposable income ratio. Round your answer to two decimal places.

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2. Calculate Chelsea’s debt-to-income ratio. Round your answer to two decimal places.

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Answer 1

a) Calculate Chelsea’s debt payments-to-disposable income ratio.

Debt-to-disposable-income ratio equals a person's total debts divided by disposable income.

Chelsea's monthly income is  $70,000 per year with about $57,600 in take-home pay, so her yearly disposable income is $57,600,

therefore monthly disposable income= 57600/12 = $4,800

Chelsea's monthly debt payments is equal to: $385 + $240 = $625

$385 per month from $38,000 of student loan debt.

+

$240 per month from credit card debt of $7000

Therefore Chelsea’s debt payments-to-disposable income ratio = ($625/$4,800)*100 = 13.02%

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b) Calculate Chelsea’s debt-to-income ratio

Debt-to-income ratio (DTI) is the amount of your total monthly debt payments divided by how much money you make a month.

Gross yearly income = $70,000.

So, gross monthly income: 70,000/12 = $5,833.33

Chelsea's monthly debt payments is equal to: $385 + $240 = $625

Chelsea’s debt-to-income ratio: ($625/ $5,833.33) *100 = 10.71%

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