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Minimizing the Repayment Cost of Federal Student Loans

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.

Ketersediaan

Informasi Detail

Judul Seri

SIAM REVIEW; Vol.64 No.3 September 2022

No. Panggil

-

Penerbit

: .,

Deskripsi Fisik

p. 689-710

Bahasa

English

ISBN/ISSN

-

Klasifikasi

NONE

Tipe Isi

-

Tipe Media

-

Tipe Pembawa

-

Edisi

-

Subjek

STUDENT LOANS
REPAYMENT
COMPOUNDING
LOAN FORGIVENESS

Info Detail Spesifik

https://doi.org/10.1137/22M1505840

Pernyataan Tanggungjawab

Paolo Guasoni, Yu-Jui Huang

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