Question

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%. 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?

Answer 1

Rich will pay interest on his $7,900 unsubsidized student loan at a rate of 4.29% over 4.5 years, the duration of his 4-year college and a 6-month grace period. To find this amount, the simple interest formula is used, and then this interest is added to the interest paid during the rest of the loan term.

Step-by-step explanation:

To determine the interest Rich will pay during the 4-year college and the additional 6-month grace period, we need to calculate the simple interest that will accrue on his unsubsidized student loan of $7,900 at an interest rate of 4.29%. We will not consider any repayments during this period since Rich is only paying the interest.

The simple interest formula is: I = P * r * t, where I is the interest, P is the principal amount ($7,900), r is the annual interest rate (0.0429), and t is the time in years. Considering the 4-year college plus the 6-month grace period, the time t will be 4.5 years.

The calculation for the accrued interest over 4.5 years is as follows:

• 
  
• I = $7,900 * 0.0429 * 4.5

After calculating the interest, the total amount he will pay in interest over the term of his loan can be determined by adding this accrued interest amount to the interest that will be paid during the actual repayment period of the loan, i.e., the remaining 5.5 years of the 10-year loan term after the initial 4.5 years have passed.