Marlie has to decide whether she could afford to make interest only payments for the first 4.5 years or decides to make no payments during the 4.5 years the interest will be capitalized at the end of the. Suppose marlie decides to defer The payments

Incomplete question. The full question read;

Marlie will be starting college next month. She was approved for a 10-year, Federal Unsubsidized student loan in the amount of $18,800 at 4.29%. She knows she has the option of beginning repayment of the loan in 4.5 years. She also knows that during this non-payment time, interest will accrue at 4.29%. Marlie has to decide whether she can afford to make interest-only payments for the first 4.5 years or defer all payments for that period of time. If she decides to make no payments during the 4.5 years, the interest will be capitalized at the end of that period. Suppose Marlie decides to defer the payments.

a. What will be the new principal when she begins making loan payments?

b. How much interest will she pay over the life of the loan?

a) $22,429.34.

b) $5,292.20

Explanation:

a. To determine the new principal when she begins making loan payments we use the simple terms formula:

S.I = principal * rate * time

principal = $18,800, rate = 0.0429 (converted to decimal; 4.29/100), time = 4.5

S.I = 18,800 * 0.0429 * 4.5 = $3,629.34

New principal = interest paid + borrowed amount = $3,629.34 +  $18,800 = $22,429.34.

b) Remember, she had paid interest for 4.5 years, meaning we are calculating the remaining 5.5 years to complete the 10-year life of the loan, also taking note of the new principal.

Hence the total Interest paid over the life of the loan = $22,429.34 * 0.0429 * 5.5 = $$5,292.20.

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