FNC111Chapter7

f. If Mary Lou suffers financially and has to file for​ bankruptcy, will her student loan debt be​ forgiven?

-Student loan debt is one of the few debts that cannot be forgiven in bankruptcy. -This is why it is so important for Mary Lou to make her payments on time and not take on new debt that she cannot support with her current income.

The​ after-tax interest rate for the student loan is

6.00%

The​ after-tax interest rate for the home equity loan is

6.84%

Are there other options for financing her​ education?

Another possible financing option is that her parents can apply for either PLUS Direct or PLUS Loans. With these​ loans, the available amount of financing depends on the total budgeted cost of education minus any other financial aid​ received, so the total amount available may be more than Mary Lou can receive through the Federal Direct or Stafford Loan programs.

b. What types of student loans are available to Mary​ Lou? ​(Select the best answer​ below.)

Mary Lou can apply for either the Federal Direct Loan or the Stafford Loan.

e. Using her current​ income, calculate her debt limit ratio for the most expensive school loan and her auto loan during the school year. Using her projected​ income, calculate her debt limit ratio for the loans after graduation. -Mary​ Lou's debt limit ratio for the most expensive school loan and her auto loan during the school year is -Mary​ Lou's debt limit ratio for the most expensive school loan and her auto loan after graduation is

- 59.26% - 11.85%

a. Explain the difference between a Direct Subsidized Loan and a Direct Unsubsidized Loan to Mary Lou. ​(Select all the choices that​ apply.)

-A major difference between Direct Subsidized and Direct Unsubsidized loans is that subsidized loans do not accrue interest while the student is in school or during the grace period. -Unsubsidized loans accrue interest from the day they are​ awarded, and students can either pay the interest as they go or let it accrue until the end of their grace period. Students must demonstrate financial need for subsidized loans but not for unsubsidized loans.

What lending limits​ apply?

-Federal Perkins Loan Program -Direct Subsidized (Stafford Loan) -Direct Unsubsidized (Stafford Loan) -Direct Plus Loan for Parents

c. Assume her student loan will have an interest rate of 8 percent and her​ parents' home equity line has a rate of 9.5 percent. If both loans have a 10​-year maturity, what will her monthly payment be on $6,000​, ignoring any possible​ deferments?

-Mary​ Lou's monthly payment on the student loan would be $72.80 -Mary​ Lou's monthly payment on the home equity loan would be $77.64

g. Considering all available​ information, which loan would you suggest to Mary​ Lou? Why? ​(Select the best choice​ below.)

Assuming Mary Lou does not anticipate dramatic increases in her salary to more than​ $60,000 that would significantly limit the amount of the student loan interest​ adjustment, the student loan is the cheaper alternative. The student loan also will contribute to her FICO score and will offer deferral options.

d. Explain the tax consequences of the two​ options, assuming Mary Lou is in the 25 percent marginal federal tax bracket and her parents are in the 28 percent tax bracket. No state income tax is assessed. Explain the tax consequences of the two options.

Mary​ Lou's parents qualify for a tax deduction on the home equity loan interest​ (within limits). Mary Lou qualifies for a tax savings on the student loan interest paid up to a maximum of​ $2,500 annually, although the eligibility for the adjustment phases out as income increases.