Question

Compare three student loans for $80,000 for 4 years of college. Compare varying student loan offers, their monthly payments and total repayment cost.

Three possible examples:

Student 1) immediately. A loan at fixed 6.25% that you pay for 10 years starting right away as a normal installment loan,

Student 2) Pay interest only. Pay interest at fixed 6.25% for the four years you are in college. Then for 6 years after college, pay the loan as a 6 year installment loan.

Student 3) Defer your payment. Pay nothing while you are in college. After you graduate, pay the loan back as a 10 year loan at 8.25%. Interest rates are higher for this option.

Answer 1

1)	PMT (using formula for loan amortization) = 80000*(0.0625/12)*(1+0.0625/12)^120/((1+0.0625/12)^120-1)) =	$               898
	Total amount payable = 898*120 =	$      1,07,760
	Total interest payable = 107760-80000 =	$         27,760
2)	Interest for 4 years = 80000*6.25%*4 =	$         20,000
	PMT for 6 years (using formula for loan amortization) = 80000*(0.0625/12)*(1+0.0625/12)^72/((1+0.0625/12)^72-1)) =	$            1,335
	Total installment payments = 1335*72 =	$         96,120
	Interest in the above = 96120-80000 =	$         16,120
	Total interest payable = 20000+16120 =	$         36,120
	Total amount payable = 20000+96120 =	$      1,16,120
3)	PMT (using formula for loan amortization) = 80000*(0.0825/12)*(1+0.0825/12)^120/((1+0.0825/12)^120-1)) =	$               981
	Total amount payable = 981*120 =	$      1,17,720
	Total interest payble = 117720-80000 =	$         37,720
	[It is assumed that no interest would be charged on the loan for
	the 4 years of deferral; that is the loan outstanding at EOY 4
	would be $80000]
4)	The results are tabulated below:
	Loan	PMT	Total Payment	Total Interest
	1	$               898	$ 1,07,760	$        27,760
	2	$            1,335	$ 1,16,120	$        36,120
	3	$               981	$ 1,17,720	$        37,720