Question

Molly Mae recently graduated from MTU, and her first student loan payment is due soon. In total, Molly Mae borrowed $50,000 to complete her degree. She plans to repay her loans using the standard repayment plan (i.e. with monthly payments at the end of every month for 10 years)

a. Assume the nominal interest rate is 4.0% per year, compounded daily (assume 30 days per month). Calculate the effective Annual interest rate for Molly Mae's student loans

b. Assume the effective interest rate is 0.75% per month. What is Molly Mae's monthly payment?

c. Assume Molly Mae's monthly payment is $650. How much money in interest, will Molly Mae pay in total on her student loans?

Answer 1

a)

Nominal rate r = 4%

Total periods m = 30*12 = 360

Effective annual rate = 4.08%

b)

Monthly payment = $633.38

The excel calculation and formula used are shown below:

c)

Total amount paid in 120 months = 650 x 120 = 78,000

Total interest = 78,000 - 50,000

= 28,000

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