Question

Matt got approved on a deferred private student loan that will be due for repayment after graduation. What is his incentive to start
paying it now if he can? (5 points)
To reduce the time to pay for it
To avoid or to lower compound interest
To avoid higher future taxes
To get a better interest rate

Answer 1

Matt's incentive to repay the student loan now is to lower or avoid compound interest, as shown in the second answer option.

We can arrive at this answer because:

• Compound interest is a type of interest on top of interest.
• This is because they are interest added to the loan capital that is used to calculate new interest as the loan period passes.
• Therefore, the longer the debtor takes to pay, the more interest will appear as compound interest, which will increase the debt considerably.

As an example, we can imagine an individual who took a loan of 300 dollars, with compound interest of 3% per month, after 6 months of the loan, the compound interest would have increased the debt to 358.21 dollars.

In this case, we can assert that the faster Matt pays off the loan, the less compound interest he will pay.

More information:

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