Caroline borrowed $8000 through the federal government's Stafford Loan program while she was studying accounting. The APR on her loan is 4.66%, and the loan must be paid back in full in 10 years. Caroline just got a job in Chicago and is about to start making monthly payments on her loan.
a.) What is Caroline's monthly payment assuming a 10-year repayment period? Round nearest cent. Payments are made at the end of the month.
b.) How much of Caroline's FIRST monthly payment in part a. above is interest and how much is reduction in principal?
c.) There are no pre-payment penalties on Safford loans, and so Caroline decides that she wants to send $200 each month instead of the amount you calculated in part a. above. In this case(sending in $200 instead of the amount in a. each month), how much of her FIRST payment is interest and how much is reduction principal?
d.) Suppose that 2 years have passed and that Caroline notices that interest rates on savings accounts have risen to 6.5% from less than 1% when she began repaying the loan. Further, she now has resources to pay off the loan in full. From a purely financial perspective, would you advise her to pay off the loan immediately? Why or why not?
e.) Assume the same situationas in part d. above except instead of assuming interest rates have risen, assume they have remained at less than 1% as they are now. Caroline can still pay off the loan immediately. Would you advise her to do so? Why or why not?