One of the many factors you should take into consideration before taking a student loan is your loan-to-income ratio. This is the ratio of your monthly debt to your gross monthly income. Of course, this strategy only really works if you have an idea of what career you plan to follow, or if you know the average starting salary of your major. A bit of research is necessary, but well worth it.
Here’s how you calculate your loan-to-income ratio:
Let’s say that every month you owe $1,500 towards rent, and $500 towards your monthly payment. If your gross monthly income is $5,000, then your loan-to-income ratio is $2,000 (the total amount you owe every month) divided by $5,000 (your total income) = 40% or 0.4.
Is 40% A Good Loan-To-Income Ratio? Yes, it is. It means you would only be only paying 40% of your income to pay off your debts so you are at low risk for defaulting on your loan payments.
How To Use The Loan-To-Income Ratio When Taking Out A Student Loan
When taking out a student loan, you must do some research into the starting gross monthly salary of your prospective career. Ideally, the maximum you should borrow is at a 1:1 ratio of your monthly debt to your expected gross monthly salary immediately after graduating.
So, calculate your monthly payments and add it to your estimated monthly rent. The total of these two should be equal to or better still, less than your potential monthly gross income.
Taking the time to figure this out can save you from making a bad decision with far-reaching consequences.
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