Vicki is contemplating consolidating her federal student loans with Loan Consolidation Experts Inc. She currently pays five separate federal loans totaling $30,000 in principal at 4.5% simple interest for 20 years. Loan Consolidation Experts Inc. is offering to consolidate her loans at 3% simple interest for 30 years. Which scenario would save Vicki the most money?
To determine which scenario would save Vicki the most money, we need to compare the total amount she would end up paying in each situation.
In the current scenario, Vicki has five separate federal loans totaling $30,000 with an interest rate of 4.5% simple interest for 20 years.
To find out how much she would pay in total, we use the formula for calculating simple interest:
Total Amount = Principal + (Principal * Interest Rate * Time)
For each loan, the total amount would be:
Loan 1: $30,000 + ($30,000 * 0.045 * 20) = $39,000
Loan 2: $30,000 + ($30,000 * 0.045 * 20) = $39,000
Loan 3: $30,000 + ($30,000 * 0.045 * 20) = $39,000
Loan 4: $30,000 + ($30,000 * 0.045 * 20) = $39,000
Loan 5: $30,000 + ($30,000 * 0.045 * 20) = $39,000
Therefore, in the current scenario, Vicki would end up paying a total of $39,000 for each loan, resulting in a combined total of $39,000 * 5 = $195,000.
Now let's consider the consolidation offer from Loan Consolidation Experts Inc. They are offering to consolidate Vicki's loans at a 3% simple interest rate for 30 years.
To calculate the total amount she would pay in this scenario, we can use the same formula:
Total Amount = Principal + (Principal * Interest Rate * Time)
In this case, the principal would still be $30,000, the interest rate would be 3%, and the time would be 30 years.
Total Amount = $30,000 + ($30,000 * 0.03 * 30) = $30,000 + $27,000 = $57,000
Therefore, in the consolidation scenario, Vicki would end up paying a total of $57,000 for the consolidated loan.
Comparing the two scenarios, Vicki would save more money by consolidating her federal student loans with Loan Consolidation Experts Inc. She would save $195,000 - $57,000 = $138,000.
So, the consolidation scenario would save Vicki the most money.