144 Unit 2 Managing Your Money Interest on student loans is simple interest: The interest accrues only on the principal balance, not on previously accrued interest. So while the student is still in school, the amount of interest that accrues each month remains constant. The interest is calculated using the simplified daily interest formula, which we can develop using things we know about simple interest. 1 year? 1. If the principal balance of a loan is $6,500 and the interest rate is 6.8% annually, how much simple interest will accrue in 2. Why does it make sense to use 365.25 days in a year for financial calculations? world ming sill at sswamioni sgigsb ogoiloo s hitw lnunsing gunmen woy sonia wei visioloads it red Piol nough SIdai s ton antell a gnudam bas ssolloo hiw bedzini savoy nadw baA elfot from vol live fuzzsoon a endof lastigle cadumpedT gru 3. Using Questions 1 and 2, find the daily amount of interest that accrues on that $6,500 loan. Make sure you explain how you got your answer. lenzing boy not it throw 4. How much interest accrues in a month? For our purposes, we can use 30.44 for the number of days in a month; this is 365.25 divided by 12. Math Note The actual interest accrued in any month will depend on the luisbel insmmavon ary yd shism ensor forobel visblango ulgim ebisubingisbou jeon Inits and number of days. We're using Elgorda sofodo Jand a inslime grove . cusol sieving bre masumavog ant vd besimmug jud atop30.44 average days per month or'boy or ,seeigno) ed baisluger sis bra nsol eri to alil andriol boxit is asign lesasani enT :vi to simplify the process just a and ad new jail inuona sidi no asmil stoveword ,sis serfT ,anil ed) awob sistwomoe selaglue bit. At worst this will result in a oviansgas vilstooges is not evilmails vino sdred idgim annol sieving bus, amsigorg neol lersbe couple dollars of error. nolizoubs nonroy shi hard er anmol inamillssent notdo bas ensol Insbute noewind sangoflib gid en , neol ari to dignol and) anddi orbio The Simplified Daily Interest Formula Principal balance x interest rateswed into Daily interest amount = - 365.25 Monthly interest amount = Daily interest amount x 30.44147 Lesson 2-6 Investing in Yourself In comparing the loans with or without interest capitalized, certainly we'd be interested in finding the difference in the total cost of the loan. Let's check it out. Solved Example 1 Comparing Loans With and Without Interest Capitalized We've seen so far that by paying interest on our $6,500 student loan while in school, we'll have a smaller monthly payment when payments begin. Will that result in an overall lower cost over the life of the loan? If so, by how much? SOLUTION For the loan with interest capitalized, every dollar you'll pay back comes from the total of the monthly payments. It's a 10-year loan, and we found that the monthly payment will be $96.42. So the total cost of that loan is immoo 10 x 12 x $96.42 = $11,570.40 Now let's attack the loan with interest not capitalized. In this case, we still have 10 years of monthly payments, at $74.80 per month: yud served bemmotai-How s smoood of nov guigled 10 X 12 x $74.80 = $8,976lim Sprod A Snivel Josbuta Sgsilos Wow! That's way cheaper. But wait-we also had to make payments while in college. That amount was $1,878.33. So the total cost of that loan is quod amell uonumbro loom sil gne comoff asia $8,976 + $1,878.33 = $10,854.33 an al Of mort amat ni sidelive visbin So by making payments while in school, we saved a total of $11,570.40 - $10,854.33 = $716.07. 10. Now, the key question when studying whether capitalizing interest is a good idea: Discuss with your group whether or not you think the amount saved by paying interest while in school would make it worthwhile to scrape together the money to make those interest payments while still a student, then write some of your thoughts.146 Unit 2 Managing Your Money 7. For the loan in Questions 1-6, what is the principal amount at the time payments begin? (This includes the original amount borrowed, plus the amount of interest that accrued until payments started.) 8. Find the monthly payment on the loan. Math Note In the Technology assignment for this lesson, you'll use a spreadsheet to do these calculations. Try it! If you find it helpful, you should use a spreadsheet for the homework as well, provided that you get the okay from your instructor. We've seen that with a student loan, you have the option of not making any payments until after graduation. When interest on an unsubsidized student loan is not paid during college, we say that the interest is capitalized. When interest is capitalized, it adds to the principal balance, which of course results in larger payments. That's what happened in the example that we've been working with so far. sili When interest is not capitalized, payments have to be made during college, but only covering the amount of interest. This keeps the principal balance the same until full monthly payments start, which makes those payments smaller. { L. For the student loan we've been working with, the payment while still in school would simply be the amount of interest that's accruing, which you already calculated. For reference, in the space below write the amount you'd pay in an average 30-day month (see Question 4), as well as the total amount of interest you'd pay before regular monthly payments begin (Question 6). to gisdil aril door ser ,for may-Of a sved ansof insboiz 120m sonia . woot boisborges od bluow salad . asblooo zu base vidsdong bluade you niggA noagile lam of slummot adt surgeba 9. With interest not capitalized, the principal balance of the loan will still be $6,500 when full payments start. Find what those payments will be. How much less is that per month than if interest was capitalized? oaiming I wov lish f'now Inr not som ban