Question

Government student loans usually do not need to be paid back until 6 months after you graduate. Interest on your loan is computed from the time you take out the loan. You have the option of paying the interest every month or allowing the interest to accumulate until you begin to pay back the loan. You have 10 years to pay back the loan. You borrow $7,200 for your freshman year of college at an annual interest of 4.45% compounds

a. Suppose you decide not to pay the interest every month while you are in school, what will be your monthly payments when you begin to pay back your loan? (Assume you will begin paying back your loan in 51 months after you took out the loan.)

b. What is the total amount that you paid for the loan? How much interest did you pay?

using excel

Answer 1

The interest is compounded at monthly intervals.

Loan balance at the end of 50 months= P*(1+R/12)^50

Where P= Principal ($7,200) and R= Interest rate (4.45%)

Therefore, balance to be repaid in monthly payments= 7200*(1+0.045)^50 = $8663.81.

(a ): If monthly interest is not paid, Monthly payments commencing 51^st month= $89.58

(b ): Total amount paid for the loan= $10,749.80

Total interest paid= $3,549.80

Calculations as below: