SIGEST

Abstract

In this section we present “Minimizing the Repayment Cost of Federal Student Loans,” by Paolo Guasoni and Yu-Jui Huang. This is the highlighted SIGEST version of an article that first appeared in the SIAM Journal on Financial Mathematics (SIFIN) in 2021. The article studies optimal strategies for repayment of federal student loans in the USA. These loans, which can be used to cover tuition and living expenses, have specific features that make them tricky to evaluate. Sections 2 and 4, as in the original SIFIN article, take account of two key student loan features: capping repayment levels at a proportion of current income, and forgiving the debt after a sufficiently long period of good standing. Sections 3 and 5, which are new to the revised SIGEST version, give results that incorporate a third feature: the effect of simple interest. The modeling and analysis presented here shed light on an important, mathematically challenging financial product and give practical insights into a complicated and potentially daunting set of choices available to those who must negotiate their way through these contracts.