Suppose Marias parents want to pay for her undergraduate edu

Suppose Maria\'s parents want to pay for her undergraduate education at Bard College, which is a small liberal arts school in Upstate New York. Suppose that tuition costs $35,000 for the 1st year. Maria\'s parents are willing to pay up to $40,000 for the 1st year of tuition. Maria\'s parents have $35,000 in an FDIC insured certificate of deposit (CD) that contractually pays 5% over the course of the next year. Another bank will give Maria\'s parents a $35,000 student loan at 3% interest with no money down. The loan is only for 1 year and the interest payment and principal payment are due at the end of the year. Instructions: Use the information in the preface to answer the following questions in an essay format:

1) Should Maria\'s parents take out a student loan, or should they pay the tuition with the balance in their bank account? Explain and defend your reasoning as to why Maria\'s parents should either take out a student loan or pay the tuition with the balance in their bank account.

2) Is there any risk or variability in the outcomes of their decision? Explain your reasoning.

Your essay needs to be a minimum of two paragraphs.

Solution

1. In my openion, Maria\'s parents should take a loan from the bank and should not use the funds which they have with them currently. Reason is really simple, if they will use the funds which they have right now, they will loose out on the 5% interest which they are supposed to get. So effectively they will not earn anything on that money. But if they take loan of the same amount from another bank, they will be charged 3%. So effectively they will earn 2% (5%-3%) on the amount. So in taking a loan, they are better off.

2. There are few risks which they might face if they are taking loan :

a) They are taking loan and no matter what, they have to return the pricipal and interest amount after the end of 1 year. Now, due to some problem, suppose they have to use the funds which they have kept in the bank.In that case, they might not be able to pay back the loan amount and have to face severe consequences.

b) Bank from where they are taking loan, if it change the interest rate in between the year and this rate now suppose become more that 5%. Then they are not in better position and have to shell out more money.