As indicated in the “All About You” feature in this chapter, a student can benefit from financial leverage by borrowing to pay for an education. However, too much leverage can result in graduates struggling to make their loan payments. With most government student loan programs, you have at least six months’ grace after your post-secondary education before you have to start paying back your loan. If you take advantage of the grace period, the maximum number of monthly payments is 114; however, you may request an extended amortization period of up to 174 months by revising the terms of your loan agreement.

Go to the Loan Repayment Estimator found at www.canlearn.ca to answer the following questions regarding monthly payments and the total interest payable on student loans. To find the Loan Repayment Calculator on the website, click on “Online Tools” and click on the link “Loan Repayment Estimator.”

(a) Interest on loans may be at a fixed interest rate or a floating interest rate. What is the difference between the two interest rates? Are there any advantages of having one over the other if interest rates rise over your payment period?
(b) What is the prime rate of interest indicated in the Loan Repayment Estimator? How is the fixed rate of interest calculated in the Loan Repayment Estimator? Assuming the prime rate of interest indicated in the calculator, what will be the fixed rate of interest?
(c) Under Option 1 in the Loan Repayment Estimator, enter the loan amount of $20,000 and assume that you take advantage of the grace period and the grace period interest is included in your loan balance. Also assume a fixed interest rate and 114 months of repayment.

1. What is the amount of each monthly payment?
2. How much interest is payable over the 114 months?

(d) Under Option 2 in the Loan Repayment Estimator, enter the amount of $30,000, and assume that you take advantage of the grace period and that the grace period interest is included in your loan balance. Also assumea fixed interest rate and 114 months of repayment.

1. What is the amount of each monthly payment?
2. How much interest is payable over the 114 months?

(e) Under Option 1 in the Loan Repayment Estimator, enter the amount of $30,000 and assume that you take advantage of the grace period and the grace period interest is included in your loan balance. Also assume a fixed interest rate and 174 months of repayment.

1. What is the amount of each monthly payment?
2. How much interest is payable over the 174 months?

(f) Assume that you accept a position when you graduate that pays you an annual salary of $48,000. After the required deductions for income tax, CPP, EI, and health benefits, your monthly paycheque is $2,800. You rent an apartment for $750 a month, have monthly payments on a car loan of $300, and your other costs for groceries, cable, Internet, insurance, gas, and phone total $1,100. How much will you have left at the end of the month to make payments on your student loan and other expenditures, such as clothes and entertainment? Can you afford to repay a $20,000 student loan? A $30,000 student loan?