Which of the following actions is most effective in reducing your total loan cost?

• A. Making extra payments toward the loan principal
• B. Extending the loan term to lower monthly payments
• C. Deferring payments until after graduation
• D. Choosing a variable interest rate over a fixed rate

Answer: (A)

Verified step by step guidance

1. Understand the concept of loan principal: The loan principal is the original amount borrowed, excluding interest. Making extra payments toward the principal reduces the amount on which interest is calculated, thereby lowering the total loan cost.
2. Analyze the impact of extending the loan term: Extending the loan term reduces monthly payments but increases the total interest paid over the life of the loan, which raises the total loan cost.
3. Evaluate deferring payments: Deferring payments until after graduation may provide temporary relief but can lead to accrued interest during the deferment period, increasing the total loan cost.
4. Compare variable interest rates to fixed rates: Variable interest rates can fluctuate over time, potentially increasing the loan cost if rates rise. Fixed rates provide stability and predictability, which can be advantageous in managing loan costs.
5. Conclude that making extra payments toward the loan principal is the most effective action to reduce the total loan cost, as it directly decreases the amount on which interest is calculated and shortens the loan term.