Maria took out an unsubsidized stafford loan of $6,925 to pay for college. she plans to graduate in 4 years. the loan had a duration of ten years and an interest rate of 5.0%, compounded monthly. by the time maria graduates, how much greater will the amount of interest capitalized be than the minimum amount that she could pay to prevent interest capitalization? round all dollar values to the nearest cent.
a. $1529.70
b. $1,384.00
c. $384.00
d. $144.90

The answer is: D) $144.90

Explanation:

If Maria pays monthly repayments of only interest, she will pay:

interest = P x R X T

Where: P = $6,925 ; R = 0.05/12 = 0.004167 ; T = 1 month

interest = $6,925 x 0.004167 x 1 = $28.85

If she pays only interest during 4 years, she will pay: 48 x $28.85 = $1,384.80

If Maria doesn't want to make any monthly payments, then she will owe:

total debt = P x (1 + R) x N

Where: P = $6,925 ; R = 5% / 12 = 0.004167 ; N = 48

total debt = $6,925 x 1.004167⁴⁸ = $8,454.70

to calculate only the interest owed:

$8,454.70 - $6,925 = $1,529.70

So if Maria decides to make monthly payments of only interest she can save:

$1,529.70 - $1,384.80 = $144.90

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