2) 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: $50,000/yr starting after graduation
- Base salary private industry job: $65,000/yr starting after graduation
- Inflation: 3% annually
- Government salary growth: 0.5% over inflation annually
- Private salary growth: 1% over inflation annually
- Living expenses: $25,000/yr starting after graduation (inflate after that)
- Loan payback (% of salary over cost of living): 30%
- Years of payback government job: 10
- Years of payback private job: 20
- Cost of college $50,000 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?