What is the actual interest paid on the following loan.
A student loan for 4 years of $25000 has a rate of interest of 8%. After the course repayment starts and has to be completed in 4 years. The student gets a tax rebate on the interest paid and the rate of taxation is 35%
The student loan is taken for $25000. Repayment starts after 4 years when the course has been completed. The rate of interest is 8%.
For the first 4 years interest is accrued on the amount borrowed that increases it to 25000*(1.08)^4 = $34012.22
A tax rebate is given on the interest amount repaid by the student.
If the loan is repaid in 4 equal installments the amount to be paid every year is given by E = 34012.22*0.08*1.08^4/(1.08^4 - 1)
The interest component in the first year's payment is 34012.22*0.08 = 2720.97
In the second year's payment it is: (34012.22 - 10268.99 + 2720.97)*.08 = 2117.13
In the third year's payment it is: 1464.98
And in the last payment it is: 760.66
The total interest paid is 7063.74
With the income tax rebate it is equal to $4591.43.
The actual interest paid on the student loan is $4591.43