Need help explaining 4, 6, 7

Mary Lou-junior, father has been downsized from job. Wants sufficient funding for senior year-wants to apply for loan.

Part time job home pay $375 a month

Expected annual net earnings after graduation: $30,000

Live at home for year or two after graduating

Can use up to $10,000 of parents home equity line of credit, not sure if she wants to

No other debt besides 3 years of monthly auto payments of $189

1. Explain difference between a Direct Subsidized Loan and a Direct Unsubsidized Loan to Mary Lou

A direct subsidized loan is only available to undergraduate students and a financial need must be proven. The amount borrowed cannot be higher than Mary Lous financial need. A direct unsubsidized loan is available to undergraduate and graduate students, in addition the student does not need to prove financial need to apply. The school determines the amount borrowed for a direct unsubsidized loan based on cost of the school and the financial aid given. Another difference between the two direct loans would be the interest paid on the loan. A direct subsidized loans allows students to not pay the interest right away for some of the time the student is still an undergraduate and students a grace period of 6 months after graduation. A direct unsubsidized loan requires students to pay interest at all times, or the interest will accrue.

2. What types of student loans are available to Mary Lou, and what lending limits apply? When would repayment of the loans begin?

The stafford direct loan and the PLUS loan are available to Mary Lou. The Stafford direct loan has lending limit of $3,500 for the first year, $4,500 for the second year, $5,500 for the third and fourth year. Repayment for the Stafford direct loan would usually begin after the course the loan is taken out for has been completed, but can have a 6 month grace period. The PLUS loan has a lending limit of the expense of the school minus any income from other areas and financial aid. The repayment for a PLUS loan begins immediately unless the student is eligible for deferment.

3. Assume her student loan will have an interest rate of 7% and her parents home equity line has a rate of 9.25%. 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?

PV= $5,000

i= 7% / 12

n= 10 years x 12

Monthly installment = $58.05

PV= $5,000

i= 9.25% / 12

n= 10 years x 12

Monthly installment = $64.02

4. Explain the tax consequences of the two options, assuming Mary Lou is in the 10% marginal tax bracket and her parents are in the 25% 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.

Total monthly debt payment= $189

Total monthly take-home pay= $375

Debt-limit ratio= 189 / 375

Current debt limit ratio is 0.5

Total monthly debt payment = $0

Total monthly take-home pay= $30,000 of annual income / 12 months= $2,500

Debt-limit ratio= 0 / $2,500

Projected debt limit ratio is 0

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?

Chapter 7 and Chapter 13 bankruptcy will not forgive student loan debt unless Mary Lous can prove undue hardship.

8. Consider all available information, which loan would you suggest to Mary Lou? Why? Are there other options for financing her education?