The Stafford plan now offers student loans at 4% annual interest. After two year

Question

The Stafford plan now offers student loans at 4% annual interest. After two years the interest rate will increase to 6% per year. If you borrow $5,000 now and $5,000 each year thereafter for a total of four installments of $5,000 each, how much will you owe at the end of year 4? Interest is computed at the end of each year Click the icon to view the interest and annuity table for discrete compounding when 1-4% per year. Click the icon to view the interest and annuity table for discrete compounding when 6% per year.

Explanation / Answer

For the first two years, interest rate charged is 4% per year.

For the next two years, interest rate charged is 5% per year.

Amount borrowed each year = $5,000

Calculate the amount owed at the end of Year 4 -

Amount owed = $5,000(F/P, 4%, 4) + $5,000(F/P, 4%, 3) + $5,000(F/P, 6%, 2) + $5,000(F/P, 6%, 1)

Amount owed = ($5,000 * 1.1699) + ($5,000 * 1.1249) + ($5,000 * 1.1236) + ($5,000 * 1.0600)

Amount owed = $5,849.50 + $5,624.50 + $5,618 + $5,300

Amount owed = $22,392

Thus,

The amount owed at the end of Year 4 is $22,392.

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