Question

After graduation, you decide that you can pay $203.24 per month extra on your student loan (standard monthly payment is 302.99), which has a balance of $50,000 and 20 years of monthly payments remaining. The annual interest rate on the loan is 4% How many years early will you be able to pay off the loan?

Answer 1

New payment = 302.99 + 203.24 = $506.23

Effective monthly interest rate = (1+0.04)^(1/12) - 1= 0.003273739782 = 0.3273739782% per month compounded monthly.

Loan balance = $50,000

We can use the annuity formula to calculate the number of months required to pay off the loan with the above inputs.

n = 119.5 months

or n = 119.5/12 = 9.95 years ~ 10 years.

Earlier it used to take 20 years to pay off the loan, now with the increased monthly payment, it takes only 10 years. So, we will be able to pay off the loan 10 years early.