As indicated in the “All About You” feature in this chapter, a student can benefit from financial leverage by borrowing to pay for an education. However, too much leverage can result in graduates struggling to make their loan payments. With most government student loan programs, you have at least six months’ grace after your post-secondary education before you have to start paying back your loan. If you take advantage of the grace period, the maximum number of monthly payments is 114, which represents a period of 10 years (120 months) minus the six-month grace period, as mentioned in the Personal Financial Literacy Activity in Chapter 10. However, you may request an extended amortization period of up to 174 months by revising the terms of your loan agreement. Assume that when you graduate from post-secondary education, you owe $30,000 on a government student loan that you must pay back.

(a) Assume that you take advantage of the grace period and the grace period interest is included in your loan balance. Also assume a fixed interest rate of 9.5% and 174 months of repayment. 

1. What is the amount of each monthly payment?

2. How much interest is payable over the 174 months?

(b) Assume that you accept a position when you graduate that pays you an annual salary of $48,000. After the required deductions for income tax, CPP, EI, and health benefits, your monthly paycheque is $2,800. You rent an apartment for $750 a month, have monthly payments on a car loan of $300, and your other costs for groceries, cable, Internet, insurance, gas, and phone total $1,100. How much will you have left at the end of the month to make payments on your student loan and other expenditures, such as clothes and entertainment? Can you afford to repay a $30,000 student loan over 174 months?