Financial Literacy: Student Loans and Repayment
Understanding borrowing costs, repayment plans, and smart loan decisions
Financial Literacy: Student Loans and Repayment
Understanding borrowing costs, repayment plans, and smart loan decisions
Financial Literacy - Grade 9-12
- 1
Maya is comparing two ways to pay for a college program. Option A is a $5,000 scholarship that does not need to be repaid. Option B is a $5,000 student loan that must be repaid with interest. Which option is financially better for Maya, and why?
Focus on whether the money must be repaid.
Option A is financially better because a scholarship does not need to be repaid. The student loan would require Maya to pay back the $5,000 plus interest. - 2
A student borrows $4,000 in a loan with a 5% annual simple interest rate. If the student pays it back after 1 year, how much interest will the loan earn?
Use the simple interest formula I = P × r × t.
The loan will earn $200 in interest because $4,000 times 0.05 times 1 equals $200. - 3
A student loan statement shows a principal balance of $8,500 and accrued interest of $340. What is the total amount owed at that time?
The total amount owed is $8,840 because $8,500 plus $340 equals $8,840. - 4
The chart shows three loan offers for the same $10,000 amount. Loan A has a 4.5% interest rate, Loan B has a 6.0% interest rate, and Loan C has a 7.5% interest rate. If all other terms are the same, which loan will usually cost the least over time?
A lower interest rate usually means less interest added to the loan.
Loan A will usually cost the least over time because it has the lowest interest rate. - 5
Jamal has a monthly student loan payment of $225. His monthly take-home pay is $2,500. What percent of his take-home pay goes to the student loan payment? Round to the nearest whole percent.
Divide the payment by the take-home pay, then convert the decimal to a percent.
About 9% of Jamal's take-home pay goes to the student loan payment because 225 divided by 2,500 equals 0.09, or 9%. - 6
A repayment plan offers a lower monthly payment but takes more years to pay off the loan. Explain one benefit and one drawback of this plan.
One benefit is that the lower monthly payment may make the loan easier to manage in a monthly budget. One drawback is that taking longer to repay the loan can lead to paying more total interest. - 7
The graph shows the total cost of a loan under two repayment plans. Plan 1 has higher monthly payments and a total cost of $18,200. Plan 2 has lower monthly payments and a total cost of $21,600. Which plan costs more overall, and by how much?
Compare the total cost amounts, not just the monthly payments.
Plan 2 costs more overall by $3,400 because $21,600 minus $18,200 equals $3,400. - 8
A student is offered a subsidized federal loan and an unsubsidized federal loan. During certain periods, the government may pay the interest on the subsidized loan. Why might the subsidized loan be a better choice if the student qualifies?
Think about what happens when interest does not build up while the student is in school.
The subsidized loan may be a better choice because the government may pay the interest during certain periods, which can reduce the amount the student owes later. - 9
A college financial aid letter lists these yearly costs: tuition $9,800, fees $1,200, housing $6,500, books $900, and transportation $600. The student receives $7,000 in grants and scholarships. How much is left to pay before using loans or personal savings?
The total cost is $19,000 because $9,800 plus $1,200 plus $6,500 plus $900 plus $600 equals $19,000. After $7,000 in grants and scholarships, $12,000 is left to pay. - 10
A student has $1,200 available from summer savings and is deciding whether to borrow the full $6,000 needed for school or borrow only $4,800. Explain why borrowing only $4,800 could be a smart financial choice.
Borrowing only $4,800 could be smart because the student would have a smaller loan balance. A smaller balance usually means less interest and lower total repayment cost. - 11
A borrower misses a student loan payment and does not contact the loan servicer. Name two possible consequences of missing payments.
Think about both short-term costs and long-term credit effects.
Missing payments can lead to late fees and damage to the borrower's credit history. It can also make the loan harder to manage if unpaid interest or penalties are added. - 12
The timeline shows a student graduating in May, a 6-month grace period, and repayment beginning in November. What is the purpose of a grace period, and what should a borrower do during that time?
A grace period gives the borrower time after leaving school before payments begin. During that time, the borrower should learn the payment amount, choose a repayment plan, update contact information, and make a budget.