UC Student Investment Proposal

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So let’s say a student graduates with a $100,000 worth of education. If he takes out a 20 year loan he pays a set amount each year until the loan is repaid. He is repaying 2012 dollars with future discounted dollars. Under the proposed plan he pays 5% of his salary for 20 years. With very low inflation, this could be a good deal, he may pay less than with the fixed rate loan. However with rampant inflation and concomitant salary increases he could end up paying more over time than if he had opted for the fixed rate loan.

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<p>I think we agree that if a student takes out a fixed rate loan, inflation helps the borrower and hurts the lender. If the student commits to pay 5% of salary, and if there is inflation, the students pays more dollars, but those dollars are worth less. If wage and price inflation are equal, the student is neither hurt nor helped by the inflation in this scenario.</p>