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QuizMultiple Choice

Student Loans

Question 1 • SEPHS - BUS 240 - Personal Finance (Summer)

Toby just graduated from four years of college. At the beginning of each year, he took out a Stafford loan with a principal of $6,125. Each loan had a duration of ten years and an interest rate of 5.3%, compounded monthly. All of the loans were subsidized. Toby plans to pay off each loan in monthly installments, starting from his graduation. What is the total lifetime cost for Toby to pay off his 4 loans? Round each loan's calculation to the nearest cent.

Answer
A
$7,904.04
B
$31,616.16
C
$10,393.82
D
$36,490.25

Explanation

Because the loans are subsidized, no interest accrues while Toby is in school, so each loan’s balance at graduation is $6,125. For each 10-year loan, use the monthly rate 0.053 ÷ 12 and 120 payments in the loan-payment formula; the total of those payments is $7,904.04 per loan. Thus, 4 × $7,904.04 = $31,616.16, so the total lifetime cost is choice b, $31,616.16.

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