CASE 2

Victor and Maria Advise Their Niece

Victor and Maria have always enjoyed a close relationship with Maria's niece Teresa, who graduated from college with a pharmacy degree. Teresa recently asked Maria for some assistance with her finances now that her education debts are coming due. She owes $19,000 in student loans and earns $44,000 per year in disposable income. Teresa would like to take on additional debt to furnish her apartment and buy a better car.

(a) What advice might Maria give Teresa about managing her student loan debt?

(b) If next year Teresa were to consolidate her loans into one loan at 6 percent interest, what advice might Maria give regarding Teresa's overall debt limit using both the debt payments-to-disposable income method and the continuous-debt method? (Hint: Use Table 6-3 on page 183 or visit the Garman/Forgue companion website to calculate monthly payments for various time periods.)