Which loan to use ?
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You are enrolling in an MBA program. To pay your tuition, you can either take out a standard student loan (so the interest payments are not tax deductible) with an EAR of 5 ½ % or you can use a tax-deductible home equity loan with an APR (monthly) of 6%. You anticipate being in a very low tax bracket, so your tax rate will be only 15%. Which loan should you use?
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Solution Summary
The solution explains how to decide which loan should be used in the given problem.
Solution Preview
We compare the after tax EAR of the two loans to make the decision that is the effective cost of the loan.
The standard student loan has ...
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