Question

3) The government is proposing a new program to encourage college students to go into government jobs (teaching and service). The program will help cover the cost of college if you work in the government. With the new program, you would only need to pay back college loans for 10 years, regardless of what you owed. Unfortunately, government salaries are generally lower than those in private industry and pay does not grow as fast. . Base salary government job: $70,000/yr starting after graduation . Base salary private industry job: $95,000/yr starting after graduation Inflation: 3.8% annually . Government salary growth: 0.8% over inflation annually Private salary growth: 1.2% over inflation annually Living expenses: $27,500/yr starting after graduation (inflate after that) .Loan interest rate: 2.7% annually · Annual loan payments: 25% of (salary minus cost of living) Years before loan forgiveness, government job: 12 Years before loan forgiveness, private job: 15 . Cost of college $55,000 per year for each of four years (no inflation) .Discount rate: 5% Assume that you are a freshman entering college and that once you start in government or industry, you stay there for 35 years. Should you consider the new government program?

Answer 1

Yes, in this situation if you are paying 25% of your gross savings Annualy towards the loan. you will only end up paying
$ 134,266.33 in 10 years against the loan with interest compounding at 2.7%. this accounts to much less than even the corpus sum of $ 220,000 (55,000x4). By opting for a government job. the students can save a huge sum of money in the long run even if the salary offered is lower than in the private sector. Please see the calculation below for amortization schedule.

A FH у к N O P Q R Salary Inflation Cost of College Economic Inflation Amount to be repaye E 104.60% 220,000.00 103.80% 134,266.33 B) Cost of living D) Loan Repayment 25% of C) E) Net Savings (C-D) 6 Year A) Salary C) A-B 70,000.00 73,220.00 76,588.12 80,111.17 83,796.29 87,650.92 91,682.86 95,900.27 100,311.68 104,926.02 109,752.62 114,801.24 70,000.00 143,220.00 219,808.12 299,919.29 383,715.58 471,366.50 563,049.36 658,949.63 759,261.31 864,187.33 973,939.95 1,088,741.18 27,500.00 28,545.00 29,629.71 30,755.64 31,924.35 33,137.48 34,396.70 35,703.78 37,060.52 38,468.82 39,930.64 41,448.00 27,500.00 56,045.00 85,674.71 116,430.35 148,354.70 181,492.18 215,888.88 251,592.66 288,653.18 327,122.00 367,052.64 408,500.64 42,500.00 44,675.00 46,958.41 49,355.53 51,871.93 54,513.44 57,286.16 60,196.49 63,251.16 66,457.20 69,821.98 73,353.24 42,500.00 87,175.00 134,133.41 183,488.94 235,360.88 289,874.32 347,160.47 407,356.97 470,608.13 537,065.33 606,887.31 680,240.55 10,625.00 10,625.00 11,168.75 21,793.75 11,739.60 33,533.35 12,338.88 45,872.24 12,967.98 58,840.22 13,628.36 72,468.58 14,321.54 86,790.12 15,049.12 101,839.24 15,812.79 117,652.03 16,614.30 134,266.33 17,455.50 151,721.83 18,338.31 170,060.14 31,875.00 33,506.25 35,218.81 37,016.65 38,903.95 40,885.08 42,964.62 45,147.37 47,438.37 49,842.90 52,366.49 55,014.93 31,875.00 65,381.25 100,600.06 137,616.71 176,520.66 217,405.74 260,370.35 305,517.72 352,956.10 402,799.00 455,165.48 510,180.41