Question

Students often take out large loans to go to college. Currently, these loans have a payoff time of 25 years at an interest rate of about 7.5% compounded monthly. Suppose the remaining principal of Dexter's student loans is $33,760 and the remaining payoff time is 15 years at the 7.5% rate. Dexter recently inherited $40,000 and wants to know if he should pay off his student loans or invest the money. What do you recommend? Why?

Answer 1

`\begin{gathered} \text{For compound interest, } \\ A=p(1+(r)/(n))^(nt) \\ p=33760,\text{ r=7.5\%, n=12, t = 15} \\ A=\text{ 33760(1+}(7.5)/(100(12)))^{12\text{ x 15}} \\ A=33760(1.00625)^(180) \\ A=33760(3.07) \\ A=103624.7 \end{gathered}`

From the result of the calculations, the total amount of the loan the student will pay back after the remaining 15 years is $103,624.7. This is very huge compared to $33,760 that he will pay if he decides to pay off his student loan now.

I recommend the student pay off his student loans rather than invest the money.

The reason for my recommendation is due to the fact that he would be paying a huge sum of $103,624.7 if he continues the loan which is far greater than the principal amount. Since he can pay off the loan from the inherited $40,000. This will be a better financial decision