Suppose a student takes 4 years to earn his undergraduate de

Suppose a student takes 4 years to earn his undergraduate degree and each year needs to take $5000 in student loans. Upon graduation, he has a total of$20, 000 in student loans. All of his loans are consolidated and have an interest rate of 6.8% annual interest rate compounded monthly. He has 30 years to pay off the loan.

i. What will the interest rate be per month? Show how you got this.

Solution

Since no interest rate has been mentioned for any of the 4 student loans of $ 5000 each and since the student, upon graduation, has a total of $ 20,000 in student loans, we assume that no interest was charged while the student was studying.

Tthe interest rate per month is (6.8/100)*(1/12) = 0.068/12 = 0.0056666667 (approximately).

Note:

The formula for computing the monthly repayment (R) of a loan is R = L [r(1 + r)ⁿ]/[(1 + r)ⁿ - 1] , where L is the loan amount, r is the monthly rate of interest and n is the number of months. Here, L = 20000, n = 30*12 = 360 , and r = (6.8/100)*1/12 = 0.068/12 = 0.0056666667 (approximately). Now R, the monthly repayment can be computed.

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