Mike is a college student who has big ideas but often fails to follow through on
ID: 2616990 • Letter: M
Question
Mike is a college student who has big ideas but often fails to follow through on those ideas. Mike borrowed $85,000 to pay for his tuition, books, and room and board. Mike is required to pay the money back to the bank, along with 6% interest, within 24 months of graduating. 2017 will be Mike’s 6th year as a full-time student at TSU and the bank is concerned about Mike’s lack of motivation to graduate and find a job so he can repay the loan. The bank meets with Mike and agrees that if he graduates in 2017, the bank will forgive $30,000 of the debt. Mike is so grateful for the bank working with him on the loan and promptly completes his general studies degree by the end of 2017. Over the next 24 months, Mike works hard and pays the bank $55,000. At that time, the bank confirms in writing that the $30,000 of debt is forgiven. At the time of the forgiveness, Mike had $20,000 of assets and no debts other than the $30,000 from the bank loan. How much income (if any) must Mike report as a result of this transaction? Be sure to explain your answer and provide citations where relevant.
Explanation / Answer
Since Mike took $35,000 and the bank forgiven that amount. He did not had to pay that amount. So that is his income. In addition to that 6% interest which he would have paid on that $35,000 is also his income.
So, Interest for 24 months = PV of 2100p.a. (i.e. 6% of $35,000) for 2 years @6% discount rate (assumption)
=2100*1.8334
= $3,850.14
So, total income = $35,000 + $3,850.14 = $38,850.14