Discussion Case 2

You work in your colleges financial aid office, and Mary Lou Hennings, a junior, has come to you for advice. She just found out that her father has been downsized from his job. To ensure that she has sufficient funding for her senior year, she needs to apply for a loan to help with expenses. She has a part-time job with take-home pay of $375 per month. She expects her annual net earnings to be approximately $30,000 after graduation, and she plans to continue living at home for another year or two. Her parents have told her she can use up to $10,000 of their home equity line of credit; however, she is not sure she wants to do that. She does not have any debt except for 3 more years of monthly auto payments of $189. She is worried about trying to pay for an additional loan while still in school, although her dad is convinced he will find another job soon and be able to make the payments.

Questions

1. Explain the difference between a Direct Subsidized Loan and a Direct Unsubsidized Loan to Mary Lou.
2. What types of student loans are available to Mary Lou, and what lending limits apply? When would repayment of the loans begin?
3. Assume her student loan will have an interest rate of 7 percent and her parents home equity line has a rate of 9.25 percent. If both loans have a 10-year maturity, what will her monthly payment be for each on a loan of $5,000, ignoring any possible deferments?
4. Explain the tax consequences of the two options, assuming Mary Lou is in the 10 percent marginal federal tax bracket and her parents are in the 25 percent tax bracket. No state income tax is assessed.
5. Using her current income, calculate her debt limit ratio for the most expensive school loan and her auto loan during school. Using her projected income, calculate her debt limit ratio for the loans after graduation.
6. What are the advantages and disadvantages of loan consolidation? What factors should Mary Lou consider when contemplating consolidation?
7. If Mary Lou suffers financially and has to file for bankruptcy, will her student loan debt be forgiven?
8. Considering all available information, which loan would you suggest to Mary Lou? Why? Are there other options for financing her education?