Question

Consider Gavin, a new freshman who has just received a Stafford student loan and started college. He plans to obtain the maximum loan from Stafford at the beginning of each year. Although Gavin does not have to make any payments while he is in school, the unsubsidized 6.8 percent interest owed (compounded monthly) accrues and is added to the balance of the loan. UNSUBSIDIZED Stafford loan limits: Freshman $6,000 Sophomore 6,000 Junior 7,000 Senior 7,000 After graduation, Gavin gets a 6-month grace period. This means that monthly payments are still not required, but interest is still accruing. After the grace period, the standard repayment plan is to amortize the debt using monthly payments for ten years.

a. Show a time line of when the loans will be taken.

b. What will be the loan balance when Gavin graduates after his fourth year of school?

c. What is the loan balance six months after graduation?

d. Using the standard repayment plan and a 6.8 percent APR interest rate, compute the monthly payments Gavin owes after the grace period.

Please show work on excel and formula. Thanks.

Answer 1

a.

Timeline and Loan balance at end of year 4 is calculated in excel and screen shot provded below:

Balance of loan at end of year 4 is $30,575.63.

c.

Gavin gets a 6-month grace period.

So, Balance of loan, 6 months after completing collage = $30,575.63  × (1 + 6.80% / 2)

= $31,615.20.

Balance of loan after 4.50 year is $31,615.20.

d.

Monthly payment of loan for 10 year is calculated in excel and screen shot provided below:

Monthly Payment in loan is $363.83.