BFIN 2201: Business Finance Loan Assignment A friend of yours recently graduated from law school with $125,000 in student debt. The interest rate on these loans is 6.25%. Your friend has various options on how to repay the loans and is asking for your help to understand the pros and cons of the various options. 1. The first option is to repay the loan with a fixed amount per month for 10-years a. How much will your friend pay each month? b. How much will your friend pay in interest over the life of the loan? (Hint: Every dollar paid on the loan will either go towards reducing the principal down to zero or towards interest) c. Suppose your friend decides to pay an extra $250 per month, how long will it take to repay the loan? d. If your friend decides to pay an extra $250 per month, how much interest will they save over the life of the loan? 2. The second option is to repay the loan with a fixed amount per month for 25-years a. How much will your friend pay each month? b. How much will your friend pay in interest over the life of the loan? 3. The third and final option is to repay the loan using a graduated repayment plan. Under the graduated repayment plan your friend’s payments will start low and increase each month1 at an annualized rate of 3%. The graduated repayment plan will repay the loan over a 10-year period. a. How much will your friend pay the first month? b. How much will your friend pay the second month? c. How much will your friend pay the final month? d. How much will your friend pay in interest over the life of the loan? 4. What are the pros and cons of each of the three loan options? 5. What did you learn from doing this assignment? 1 This is slightly different than the real graduated repayment plan where payments increase only every two years. To make the problem easier, however, assume that the payments increase each month.
