You received a $5,000 loan at the end of each of your four years of college. Aunt Rose agreed to pay off your loans at the end of your fourth year of school. How much will she have to pay? Assume a 4% interest rate compounded annually on student loans.
A) $20,000.
B) $21,235.
C) $39,930.
D) $50,000.
E) None of the other answers are correct.

Question

Quizplus · Accepted Answer

Each loan of $5,000 accumulates 4% interest annually. At the end of the first year, the loan balance will be $5,200 ($5,000 x 1.04). At the end of the second year, the loan balance will be $5,408 ($5,200 x 1.04), and so on. By the end of the fourth year, the loan balance will be $5,935.63 ($5,000 x 1.04^4). Therefore, the total amount owed at the end of the fourth year is $23,742.52 ($5,935.63 x 4). Aunt Rose agreed to pay off the loans at the end of the fourth year, so she will have to pay $21,235 ($23,742.52 - $5,000 x 4) to cover the loans plus the accumulated interest.

You Received a $5,000 Loan at the End of Each