Question
Suppose you graduate from college with a total of $50,000 in debt. The interest rate you must pay on this debt is 10% and you
Suppose you graduate from college with a total of $50,000 in debt. The interest rate you must pay on this debt is 10% and you must make monthly payments towards it.
a. If you want to pay this off in 5 years, what will your payment be? ANS: 1062.35
b. If you want to pay this off in 10 years, what will your payment be? ANS: 660.75
c. Ok, so now suppose you want to choose between paying it off quickly and then beginning your investments or splitting your money between paying it off and investing. Assume you will have the enough disposable income to make the payment from part a) if you so choose. Further assume that if you are not paying the full amount into debt, whatever is left over (from part a) will go into an investment account that will earn 8% interest annually. Once you have paid off the debt, the full payment from part a) will go into that same investment account. Which option gives you higher retirement savings 40 years from now?
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