Student Loan
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Read the quote at the beginning of this section. Interpret the quote in terms of what you have learned about student loans.
Use the following situation to answer questions 2-6.
Rich is attending a 4-year college. As a freshman, he was approved for a 10-year, federal unsubsidized student loan in the amount of $7,900 at 4.29%. He knows he has the option of beginning repayment of the loan in 4.5 years. He also knows that during this nonpayment time, interest will accrue at 4.29%.
2. How much interest will Rich ace during the 4.5-year nonpayment period?
3. If Rich decides to make no payments during the 4.5 years, the interest will be capitalized at the end of that period.
What will the new principal be when he begins making loan payments.
How much interest will he pay over the life of the loan?
4. Suppose Rich only paid the interest during his 4 years in school and the 6-month grace period. What will he now pay in interest over the term of his loan?
5. Rich made his last monthly interest-only payment on November 1. His next payment is due on December 1. What will be the amount of that interest-only payment?
6. Suppose that Rich had decided to apply for a private loan rather than a federal loan. He is considering a 10-year loan with an interest rate of 5.9%.
Determine his monthly payment.
What is the total amount he will pay back?
What is the total interest amount?
7. Martina's grandparents paid for the first 3 years of her college costs. As a senior, she was approved for a federal unsubsidized loan in the amount of $9,300 at a 4.29% interest rate for 10 years.
If she chooses to make interest-only payments until the monthly loan payments are due, for how long will she be making interest-only payments?
What would be the total amount of her interest-only payments?
If she begins her loan repayment with no interest capitalization since she already paid the interest when she was in school and during the 6-month grace period, how much will she have paid in interest for this loan by the end of the 10-year loan period?
8. Ted is a freshman attending a 4-year college. He has been approved for an $8,000 subsidized federal loan at 4.29% for 10 years. How much will the U.S. Department of Education subsidize in interest costs during his 4.5-year nonpayment period?
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Solution Summary
Step-by-step formulas and calculations are shown for each problem.
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1.
The quote is saying that student loans are an investment in one's future. It is worthwhile to take on debt while in college as one can make a good living after graduation. The salary of a college graduate will more than pay for the debt incurred.
2.
This is a simple interest problem.
Convert 4.29% into decimals.
4.29 / 100 = 0.0429
Use the formula I = P * r * t
where P = $7,900
r = 0.0429
t = 4.5
Interest = $7,900 * 0.0429 * 4.5 = $1,525.10
3a
New principal = Old principal + Interest
i.e. add $7,900 to the answer from #2.
New principal = $7,900 + $1,525.10 = $9,425.10
3b
Find the monthly payment of the annuity.
Use the formula Pmt = r * PV / [1 - (1+ r) ^ (-n)]
where r = 0.0429 / 12 = 0.003575
PV = 9,425.10
n = 12 * 10 = 120
Pmt = 0.003575 * 9,425.10 / [1 - (1 + 0.003575) ^ (-120)]
= $96.73
Total paid over 10 years = $96.73 * 120 = ...
Education
- MSc, California State Polytechnic University, Pomona
- MBA, University of California, Riverside
- BSc, California State Polytechnic University, Pomona
- BSc, California State Polytechnic University, Pomona
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