You estimate that you will owe $42,800 in student loans by the time you graduate. The interest rate is 4.25 percent. If you want to have this debt paid in full within six years, how much must you pay each month?

Question

Quizplus · Accepted Answer

Using the formula for the monthly payment on a loan:

M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]

Where:
M = monthly payment
P = amount borrowed
i = interest rate per month (annual rate divided by 12)
n = total number of payments

We can solve for the monthly payment needed to pay off the loan in six years:

M = 42800 [ 0.0425/12 (1 + 0.0425/12)^72 ] / [ (1 + 0.0425/12)^72 – 1]
M = $674.50

Therefore, the best choice is B.

You Estimate That You Will Owe $42,800 in Student Loans