Katie is 23 years old and graduated in 2016 from Niagara University with a degree in Supply Chain Management. She works as a planning analyst at Labatt USA, located in Buffalo, NY. She currently earns a salary of $54,000 per year, and she expects to get salary increases of 3% per year. After your meeting with Katie last week, she has asked for your assistance with these questions:
1) Student loans:
She has a total of $23,000 in student loans. The loans are at an interest rate of 6.75% APR. She knows that she will start paying them off this year, and that she will need to make monthly payments for 10 years. Calculate her monthly payments.
She could refinance her loans at a lower interest rate of 5.25%. However, to do this, she will have to pay a fee at $1,500. What would her monthly payments be? Does this make sense given the $1,500 fee?
2) Home Ownership:
Katie would like to buy a home in 5 years. M&T Bank has told her that they will give her a mortgage with a payment no larger than 28% of her salary at the time she buys the house. How much would be the maximum monthly payment she could be approved for? If she gets a conventional, 30-year fixed rate mortgage, at an APR of 5.1%, what is the total amount she can borrow?
If she puts down a 10% down payment, how much can she afford to spend on a home?
3) Education:
She is considering going back to Niagara to get a Masters of Business Administration (MBA). The MBA will take two years, and she expects that it will cost at total of $32,000. She would receive her degree in 2021, when she is 26 years old. She has been told that with a MBA, she would receive a salary increase of $6,000 per year. If she stays with her present company until she retires at age 67, what is the total value of the MBA (assume a 5% interest rate and calculate the present value).
Given the MBA cost, and the present value, is this a good financial move?
4) Retirement Planning:
She plans on working until she is 67. She feels that in retirement, she would be comfortable living on 70% of the income she had in the year before she retires. If she gets the MBA, and lives for 25 years in retirement, with a 5% interest rate, how much would she need to have saved to retire? How much does she need to save every month to get to that amount?