Question

Henry wants to avoid interest capitalization on his $7,800 unsubsidized Stafford loan. Henry will graduate in four years, and the loan has a duration of ten years. The loan has an interest rate of 5.6%, compounded monthly. How much must Henry pay every month to avoid interest capitalization?

Answer 1

Interest capitalization means adding the interest to the principal balance. To avoid that you need to keep the balance at or below $7800. Let's assume Henry wants to pay the minimum amount necessary to avoid interest capitalization. Then, since it compounds monthly at an APR of 5.6%, each month a certain amount is added to the balance. That amount should be the yearly interest rate divided among the months in the year. Multiply that number by the principal to see how much interest accrues at the end of each month. That's what Henry needs to pay.