Attending college or university is a time consuming process. Students face multiple expenses, such as tuition, living expenses, meal plans, transportation, books, and stationery costs. This can cause students and families to seek additional financial assistance. In this scenario, knowing the math tips and tricks of the business can help students and parents deal with financial dilemmas such as:

Should I seek loans to finance the university?

How much can I borrow?

Should I choose a federal loan or a private loan?

What is the difference between subsidized and non-subsidized loans?

Do I have to pay off a federal loan in full?

When does the reimbursement start?

How much interest do I have to pay on a subsidized or unsubsidized federal loan? How is this interest calculated?

Students should first browse the university’s website and other websites and institutions for scholarships and grants. It is best for a student to maximize scholarships and special grants as they are offered free of charge for their academic activities. Scholarships, grants, and work-study income do not have to be repaid if you complete the period for which you received the money.

Students who still do not have funds after exhausting the above options should consider taking out loans. Financial assistance in the form of loans is available from the federal government as well as private banks and lending institutions to help aspiring students achieve their academic and professional goals.

When a person borrows money on loan from a bank or financial company, the borrowed money must be repaid with interest. This means that the borrower is required to pay the originally borrowed money (principal) as well as the cost of using the funds (interest) as repayment. The same is true for federal loans. It is important to understand the fine print before opting for a loan to finance higher education.

Soft loans are based on financial need. For these loans, the federal government usually pays the interest that accrues while the borrower is in higher education and during the grace period.

In the case of subsidized loans, the borrower only has to repay the principal and does not have to bear the burden of interest payments.

On the other hand, on non-subsidized loans, interest begins to accrue from the date of disbursement and continues for the duration of the loan. And it is the borrower who is fully responsible for paying the interest as well as the principal amount regardless of the status of the loan.

Federal interest rates on student loans are fixed and do not vary based on the personal financial history of the student borrower. Interest rates are generally lower for undergraduates and higher for graduate students and parents.

Simple interest loans charge interest only on the unpaid principal, while compound interest loans charge interest on the principal amount plus unpaid interest. This makes these more expensive than simple interest loans. It also means that the amount you have to repay will be more than the amount you borrowed. For this reason, it helps to know the math behind the composition so that you are aware of your repayment obligation.

For example, if your outstanding loan balance is $ 10,000, the interest rate is 2.75% and the billing cycle is based on a monthly frequency, then:

Capital = $ 10,000

Interest rate = 2.75%

Simple interest for one year = $ 10,000 x 2.75% = $ 275

Interest compounding refers to the addition of unpaid interest to the principal balance of a loan to calculate future interest. If interest is added to the principal in the example above, higher interest amounts will accumulate on the loan in subsequent years. This means that the borrower ends up paying interest on the principal as well as interest on the interest. You can better understand by studying the following calculation:

Capital at the start of year 2 = $ 10,000 + $ 275 = $ 10,275

Interest rate = 2.75%

Annual interest for year 2 = $ 10,275 x 2.75% = $ 282.56

Likewise, we can calculate the outstanding amount of principal and interest for the following year and each subsequent year:

Capital at the beginning of year 3 = $ 10,275 + $ 282.56 = $ 10,557.56

Interest rate = 2.75%

Annual interest for year 3 = $ 10,557.56 x 2.75% = $ 290.33

Non-subsidized loans are governed by terms decided at the start of the loan term.

This usually includes a repayment grace period, which is 6 months, starting one day after graduation. Some borrowers may be eligible for a deferral if they are enrolled in college or university at least part-time or due to economic hardship or unemployment. This is called the adjournment period.

However, interest on unsubsidized loans is charged at all times – periods of course, deferral, and grace – from the time the loan is disbursed until it is paid off in full. For the payment of interest, the borrower has a choice: pay the interest or let it accumulate (accumulate) and be capitalized (i.e. added to the principal amount of the loan balance).

In other words, if the interest on the unsubsidized federal student loan is not paid as it accumulates, its capitalization results in an increase in the outstanding principal on the loan. Interest is then charged on this higher principal balance (principal plus accrued interest) due to compounding, which increases the overall cost of the loan. This can increase the amount of the monthly payment or the total number of installments payable by the borrower.

Using the previous example, if the original loan balance is $ 10,000, the simple interest rate is 2.75%, no payment is made during the approximately 45 month period of study. first cycle and subsequent grace period of 6 months (51 months), the amount of accrued interest at the start of the repayment period would be:

$ 10,000 x (0.0275 / 365 days) x 1,551 days = $ 1,169

This interest will be added to the principal so that the loan balance for repayment will become $ 11,169 ($ 10,000 + $ 1,169). If a repayment is missed or deferred, the payment amount will be added to the loan.

Let’s try to consider a real simplified situation where the student borrows $ 5,000 each in unsubsidized loans in first, second, third, and fourth year of undergraduate study, and the interest rate stays the same.

  1. Amount borrowed in the first year = $ 5,000

Interest rate = 2.75%

Simple interest for 51 months = $ 5,000 x (0.0275 / 365 days) x 1,551 days = $ 584.50 (a)

  1. Amount borrowed in the second year = $ 5,000

Interest rate = 2.75%

Simple interest for 39 months = $ 5,000 x (0.0275 / 365 days) x 1,186 days = $ 446.78 (b)

  1. Amount borrowed in the third year = $ 5,000

Interest rate = 2.75%

Simple interest for 27 months = $ 5,000 x (0.0275 / 365 days) x 821 days = $ 309.28 (c)

  1. Amount borrowed in the fourth year = $ 5,000

Interest rate = 2.75%

Simple interest for 15 months = $ 5,000 x (0.0275 / 365 days) x 456 days = $ 171.78 (d)

At the end of the 51 month period, the outstanding student loan balance will become

$ 20,000 + (a) + (b) + (c) + (d) = $ 21,512.34

This amount will begin to accumulate interest, and if the repayment schedule is not met, the accrued interest will be added to the outstanding principal due to the effect of funding, resulting in even higher student debt.

The above points can serve as guidelines to keep in mind when calculating the effect of compounding on interest payments on all kinds of loans. However, the accumulated amount may change depending on the frequency of dialing. If the interest is compounded annually, we add the annual unpaid interest to the outstanding loan at the end of the year. If the compounding is monthly, the unpaid interest is added to the unpaid debt each month. With some loans, interest can be compounded daily, meaning that unpaid interest continues to be added to principal on a daily basis.

To get a fair idea of ​​the other key points of business math tips and tricks, focus on understanding and building your knowledge of concepts by leveraging Cuemath.

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