Sebastian has just graduated after four years of university. He took out an unsubsidized Stafford loan worth $8,180 to help pay for his tuition. The loan has a duration of ten years. If the loan has an interest rate of 5.3%, compounded monthly, how much interest capitalization has occurred by the time he graduated? Round all dollar values to the nearest cent.

$1,926.97

Explanation:

Given the following :

Loan amount (L) = 8,180

Interest rate (I) = 5.3%

Period (n) = 4 years

Using the formula:

A = L(1 + I/t)^nt

Where A = final amount

t = number of compounding periods per year

A = 8180( 1 + 0.053/12)^(4 * 12)

A = 8180 ( 1 + 0.0044166)^48

A = 8180 * ( 1.0044166)^48

A = 8180 * 1.2355709

A = 10106.970

Final amount after 4 years = 10,106.970

Hence amount Paid as interest over that period will be :

Final amount - Loan amount

10,106.970 - 8,180

= $1,926.97

forbearance of student loan payments. under forbearance, your loan payments are postponed (or reduced) but interest continues to accrue during the period of forbearance. if you don't pay the interest during that period, the interest may be “capitalized,” which means it is added to your principal balance.