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In: Finance

If the average starting salary in your chosen job is $40,000, what is the maximum student...

If the average starting salary in your chosen job is $40,000, what is the maximum student loan debt you should borrow to keep your monthly payments manageable?

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Expert Solution

Solution

There are 3 deciding factors or ratios that the banks calculate using the net income of a person to determine his or her eligibility for a loan:

  1. Fixed obligation to income ratio (FOIR)
  2. Loan-to-value ratio (LTV)
  3. Instalment income ratio (IIR)

To calculate the maximum student loan debt one should borrow to keep your monthly payments manageable, We need to calculate FOIR because FOIR is calculated on salary, which is given in the question.

Annual Salary =$ 40000 => Given

Usually, Banks and other Financial Institutions assume FOIR as 50% of the monthly Income, and there is no other Obligation is mentioned in the question, then Maximum monthly borrowing that the person is eligible will be,

FOIR=50%$3333.33

FOIR=$1666.66

To calculate annual borrowing , FOIR12=$1666.6612=$19999.98

Then, if the loan tenure is 10 years, Then maximum Student loan than can be borrowed will be,

$19999.9810=$199999.8

jeff jeffy answered 1 year ago
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