Minimizing the Repayment Cost of Federal Student Loans

被引:0
|
作者
Guasoni, Paolo [1 ,2 ]
Huang, Yu-Jui [3 ]
机构
[1] Dublin City Univ, Sch Math Sci, Dublin 9, Ireland
[2] Univ Bologna, Dipartimento Stat, I-40126 Bologna, Italy
[3] Univ Colorado, Dept Appl Math, Boulder, CO 80309 USA
关键词
student loans; repayment; compounding; loan forgiveness;
D O I
10.1137/22M1505840
中图分类号
O29 [应用数学];
学科分类号
070104 ;
摘要
Federal student loans are fixed-rate debt contracts with three main special features: (i) borrowers can use income-driven schemes to make payments proportional to their income above subsistence; (ii) after several years of being in good standing, the remaining balance is forgiven but taxed as ordinary income; and (iii) accrued interest is simple, i.e., not capitalized. For a very small loan, the cost-minimizing repayment strategy dictates maximum payments until full repayment, forgoing both income-driven schemes and forgiveness. For a very large loan, the minimal payments allowed by income-driven schemes are optimal. For intermediate balances, the optimal repayment strategy may entail an initial period of minimum payments to exploit the noncapitalization of accrued interest, but when the principal is being reimbursed maximal payments always precede minimum payments. Income-driven schemes and simple accrued interest mostly benefit borrowers with very large balances.
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页码:689 / 709
页数:21
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