Question

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 non-payment period?

Answer 1

$1544.40

Explanation:

You want to know the amount of interest cost subsidized by the Department of Education during the 4.5-year non-payment period on an $8000 subsidized federal loan at 4.29%.

Interest

The interest accrued on the loan amount is found by the simple interest formula:

I = Prt

The principal is $8000, the rate is 4.29%, and the time period is the non-payment period, 4.5 years. The interest is ...

I = $8000·0.0429·4.5 = $1544.40

The DoE will subsidize $1544.40 in interest during the non-payment period.

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Additional comment

For the purpose of this problem, the 10-year period of the loan is irrelevant, as we're only concerned with the 4.5 year period before repayment starts. Because the loan is subsidized, that interest is never "capitalized" and is not due to be repaid by the borrower.

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