Consider again the setting of Problem 18.

Now that you realize your best investment is to prepay your student loan, you decide to prepay as much as you can each month. Looking at your budget, you can afford to pay an extra $250 per month in addition to your required monthly payments of $600, or $850 in total each month. How long will it take you to pay off the loan?

Problem 18

You have an outstanding student loan with required payments of $600 per month for the next four years. The interest rate on the loan is 10% APR (monthly). You are considering making an extra payment of $175 today (that is, you will pay an extra $175 that you are not required to pay). If you are required to continue to make payments of $600 per month until the loan is paid off, what is the amount of your final payment? What effective rate of return (expressed as an APR with monthly compounding) have you earned on the $175?