Personal Finance / Unit 6: Paying for College and Big Purchases
6.4 Student Loans and Repayment
Notes
Student loan borrowers owe principal plus interest. Know the terms before you sign.
- Some loans charge interest while you are in school (it accrues) and some do not (for example, subsidized loans). Unpaid interest can be added to the balance.
- Example (made-up simple interest): $5,000 at 4% for 4 years in school accrues $5000 \times 0.04 \times 4 = 800$, so you would owe $5,800 at the start of repayment.
- Example: $10,000 at 5% simple interest for 10 years has interest $10000 \times 0.05 \times 10 = 5000$. Total $15,000, or $125 per month over 120 months.
- Missing payments can hurt your credit and may lead to default.
- A good rule: total student debt should not be more than what you expect to earn in your first year.
Practice
A loan's unpaid interest is added to the balance while the borrower is in school. This is called:
Interest accrues when it builds up on the loan.
Using made-up simple interest, how much interest accrues on a $6,000 loan at 3% for 4 years?
$6000 \times 0.03 \times 4 = 720$.
A borrower owes $12,000 and repays it over 10 years with no interest. What are the monthly payments?
10 years is 120 months, and $\displaystyle \frac{12000}{120} = 100$.
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