Question

Questions: Suppose that you plan to borrow $20,000 student loans to attend UM-Dearbom. You are considering borrowing the loan from SallicMac. Sallic Mac offers two options for the repayment of your loan. One is the deferred repayment option and the other is interest repayment option. The APR for the deferred repayment option is 5.75% and the APR for the interest repayment option is 4.75%. You plan to finish your undergraduate study in UM-Dearbom within four years. The two repayment options are described as below Deferred repayment option: You make no scheduled student loan payments for 4 years while you are in school and in 1 year of the grace period after you graduate. However, the unpaid interest every month will be added to your principal amount at the end of your grace period. After the grace period, the total amount your will pay will be equal to the principal you borrow and the accumulated unpaid interest. Each month you will be required to pay the same amount, which includes interest and the required principal repayment. You are required to completely pay off your loan within 10 years, Interest repayment option: You pay interest every month when you are in school and in grace period. After the grace period, you will start to pay the principal of the loan. Each month you will be required to pay the same amount, which includes interest and the required principal repayment You are required to completely pay off your loan within 10 years. 1. Please use Excel to work on the following questions: 1) Set up the loan amortization tables for the loans with these two different repayment options, respectively, 2) How much interest will you pay in total when you pay off your loan offered by these two different repayment options, respectively? 3) How much will you pay in total, including interest and principal, for these two different repayment options, respectively? 2. Write one-page memo to summarize your results obtained in the first question and discuss which repayment option you would like to choose. You can address the memo to Prof. Xie

please help

Answer 1

Question 1. Amortization schedule

1.1 Amortization schedule - Deferred Repayment Option (DRO)

Deferred Repayment Option DRO 20.000 523 Borrowed amount 5) APR Annual Percentage Rate) Repayment ten years) Repayment tenure months) School stay Grace period (months) Monthly interest during School & Grace period Total Interest Unpaid (DRC)/ Paid RO) Principal Outstanding at the end of first five year 23.750 EMI quated Monthly instalment using formula PMT in Excel for the last 6 months Principal Repayments S000 Total Payment (5) 5000 5000 $0.00 $0.00 $0.00 $0.00 99.00 S000 $0.00 99.00 S000 500g S000 5000 5000 S90 S000 S000 $800 9900 $0.00 S000 $0.00 $0.00 S000 Saco Sago $0.00 Saco Soco Sco SOCO $0.00 $0.00 $200 5000 MEMANRAANRAMNRRRRR 5900 $0.00 S900 $0.00 $0.00 $0.00 500 0.00 $0.00 $0.00 $0.00 $9.00 S000 S000 S000 S000 $0.00 $0.00 S000 99.00 $0.00 S000 S000 $0.00 99.00 $0.00 $0.00 $0.00 $0.00 $0.00 S000 S000 99.00 99.00 MBOWE CEWE CRANB398 BRENRRRRRRRRR $0.00 $12. $121.61 $ 5000 S71.) S73.23 San San S Sa Sa SO SOLE SOLE WILLILIBELLISS SO BURBE SO 1572.22 SU SOS ($66.11 $64.5 $81.3 $992 $57.5 $434 SD S439 $44.20 S49.31 ($16.41 50 50 SS. $S1.52) $49.00 $47.26 I56.12) $42.96 $40.80 $38.62 $26.44 $34.24 $32.00 $29.91 ($14.71 S451.87 (5454 500 500 (5458.40 S40. $94 $5.35 $23. $20.54 IS8.57 $16.28 SO 500 $44 500 SED (54672 Sca. (5471.73 S4739 5476.27 (547.5 SUND SU 51. 5457.73 54902 $11. 57.05 (54.71 SED $2. 99 152.99

1.2 Amortization schedule - Interest Repayment Option (IRO)

Interest Repayment Option (RO) 20.000 Borrowed amount ($) APR Annual Percentage Rate) % Repayment tenune (years) Repayment tenune months) School stay +Grace period (months) Monthly interest during School & Grace period Total interest Unpaid (DRO) / Paid RO) 4.750.00 Principal Outstanding at the end of first five year 20.000 EV Equated Monthly instalment) using formula PMT in Excel for the last 60 months ($75.14) Principal Repayments $79.17) $79.17 $79.17 $79.17) EEEEEEEEEEEEEEEEEEEEEE &&&&&&&&&&&&&&&&&&&&&&& 8888888888888888888888 52 52 $0.00 $79.17 $79.17 $79.17) $79.17 $79.17) $79.17) $79.17) $79.17 $79.17 $79.17) $79.17 $79.17) $79.17) $79.17) $79.17 57.17 $79.17) $79.17) $79.17 $79.17) $79.17) $7.17) $79.17 $79.17) $79.17 $0.00 Total Payments 57917 (579171 7917 197917 157417 (579171 7917 197917 197917 (579171 57917 197917 157417 (579171 7917 $79.17 197917 (579171 57917 197917 157417 (579171 7917 $79.17 197917 (579171 57917 (579171 $79.17 (579171 $7917 (579171 (579171 $79.17 (579171 579171 $79.17 $7917 $79.17 579171 $79.17 $7917 (579171 579171 $79.17 $7917 (579171 579171 $79.17 $7917 (579171 579171 $79.17 $7917 (579171 579171 $79.17 $7917 (57917 REMEMANHAANRANNARRHARMOWEVERGO 98GBRERRRRRRRRRRRRRRRR $0.00 $0.00 $26.97 $297.14 $299.50 S300. S0198 SOT S304.27 S306.68 S307.90) S309.12 S 10.34) S11.57 12.30) S3 14.04 SI5.28 S316.3 $37514 $37514 $375.14 $575 14 $37514 $575 142 $37514 $75141 $37514 $37514 $375.14 $75141 $37514 $575 142 $37514 $75141 $37514 $37514 $375.14 $75141 $37514 $37514 $37514 $79.17 $79.17) 7.17) $7.17) $79.17 $79.17) 5717) $79.17) $79.17 $79.17) $78.00) $76.82) $75.64 $74.45) $73.25) $72.00) $70.87 S .56) $68.45) $67.24) $66.62 $64.80) $63.57) $62.34) $61.10 $59.35) $58.61 $57.35) $56.10 $54.93) $53.57) $52.29) $51.00 $49.73) $48.44) $47.15) $45. $44.55) $43.24) $41.99) $40.61 $39.28) $375) $36.62) $35.28 $33.99) $32.58) Sa.za) $29.87 $28.50) $27.3) $25.75) $24.37 $22.99) $21.58) $20.18) $15.78 $17.37) $15.95) $14.53) SE $11.67) $10.28) $8.79) S3 19.04 S320.31) S321.57 S322.5 $324.12 $325. $3.29.29 S331.90 33.21 $334.53 S335.86 37.1 33.52 339.36 $341.20 $342.56 $343.91 $345.27 5346.54) S48.00 $349.39) S350.77 $352.16 $35.55 354.95 S356.36 $137.77 $399.19 S360.61 $36.00 $37514 $37514 $375.14 $75141 $37514 $575 142 $37514 $75141 $37514 $37514 $375.14 $75141 $375.14 $575 142 $37514 $75141 $37514 $37514 $375.14 $75141 $37514 $575 142 $37514 $75141 $37514 $37514 $375.14 $75141 $37514 $37514 $37514 $37514 $37514 $75141 $37514 I AREN SS.58) $4.42 $364.90 366.35 (5367.80 (S .25 $370.72 1272.19) $373.66) $1.48 $7253 $20.000.00) $27,258.29)

1.3 Interest, Principal and Total Amount payable under DPO & IRO

Parameters Borrowed amount (S) APR (Annual Percentage Rate) % Repayment tenure (years) Repayment tenure (months) School stay +Grace period (months) Deferred Repayment Option (DRO) Interest Repayment Option (IRO) DRO Over IRO $20,000.00 $20.000.00 5.75 4.75 10 10 120 120 601 T Monthly interest during School & Grace period Total Interest Unpaid (DRO) / Paid (IRO) 95.83 $5,750.00 79.17 $4,750.00 Principal Outstanding at the end of first five year $25,750.00 $20,000.00 $5,750.00 $4,750.00 Summary Interest paid during School & Grace period Interest paid during Repayment period (last 60 months) Total Interest Paid for the Loan Total Principal Repaid Total Amount Payable for the Loan $2,431.61 $3,939.91 $9,689.91 $20,000.00 $29,689.91 $2,508.29 $7,258.29 $20,000.00 $27,258.29 $2,431.61

Q2. Memo to Prof. Xie

DRO offers the flexibility of not paying any interest during the school and grace period, which may be very crucial for a full-time student as she/he needs to fully concentrate on her/his studies without worrying about repaying monthly installments. However, this luxury of flexibility comes at a higher cost on two counts, viz., APR of 5.75% for this option is a full percentage higher than that of IRO, and the student borrower has to pay interest on accumulated unpaid interest in addition to principal outstanding of $20,000. Consequently, such borrower has to $2,431.61 more in the form of additional interest as against an IRO borrower.

IRO offers the flexibility of paying any interest during school and grace period, which may be even for a full-time student as she/he may work part-time to earn sufficient income during free time and weekend without hampering her/his studies. However, this lower cost of APR at 4.75% (a full percentage lower than that of DRO) comes at a higher hardship and greater level of general and financial discipline of the student. Additionally, the student borrower has no accumulated unpaid interest. Consequently, such borrower has to $2,431.61 less in the form of additional interest as against a DRO borrower.