(Press-News.org) After graduating or leaving college, many students face a difficult choice: Try to pay off their student loans as fast as possible to save on interest, or enroll in an income-based repayment plan, which offers affordable payments based on their income and forgives any balance remaining after 20 or 25 years.
There are pros and cons to each option, and trying to discern the better path can be daunting. That's why University of Colorado Boulder's Yu-Jui Huang and Saeed Khalili, a former graduate student in financial mathematics, along with Dublin City University's Paolo Guasoni, decided to throw a little mathematical muscle at the problem.
The researchers developed a novel mathematical model for determining the optimal student loan repayment strategy, based on an individual borrower's specific circumstances. In April, they published a paper outlining their approach in the SIAM Journal on Financial Mathematics.
Instead of choosing one of these distinct options and sticking with it, some borrowers should consider combining the two to create their own hybrid repayment strategy, the researchers found.
"The rule of thumb is that if your balance is really small, just pay it as quickly as possible, and if your balance is large, then enroll in an income-based scheme right away," said Huang, a CU Boulder assistant professor of applied mathematics who specializes in mathematical finance and applied probability.
"We find that, between these two extremes, there's actually a third strategy, which is, you should pay as much as possible over the first several years. And after that, switch to an income-based repayment scheme."
The model incorporates basic, fundamental mathematics, Huang said, but is likely the first of its kind for student loans. Past studies were mostly empirical, estimating the actual effects of student loans on the economy and on individual borrowers. Very little research has been conducted through the lens of mathematics on the best strategy a student borrower should employ, he said.
The researchers saw an opportunity to contribute to the academic literature while at the same time helping borrowers make savvy repayment decisions. Student loans now total roughly $1.7 trillion and affect nearly 45 million borrowers in the United States, hampering their ability to buy homes, start businesses and attend graduate school.
"We made the model as simple as possible," Huang said. "For many students, this can save them money."
The model takes into account the fact that borrowers have to pay income tax on any loan amount that's forgiven under an income-based repayment plan, as well as the compounding interest rates of various student loans. It helps borrowers determine when they should stop making regular payments and switch to an income-based repayment scheme, a point in time called the critical horizon.
"The critical horizon is the time at which the benefits of forgiveness match the costs of compounding," the researchers write.
Already, the researchers are considering ways to improve their model. For one, they hope to incorporate more randomness into the model, which right now asks borrowers to take their best guess at their future income level, tax rate and living expenses. They also want to consider lifestyle changes that may affect borrowers' motivation for paying off student loans, such as getting married, buying a house and having children.
"In practice, what people say is, 'Yes, I'm going to be a dentist. Looking at past data, I know my starting salary should be this and, after a few years, my salary should grow to this particular stage and so on,'" Huang said. "The purpose of introducing the randomness here is because some dentists become really rich in five or 10 years, and some others are not so rich. Even if you look at the data, you can't be quite sure which category you will eventually fall into."
Though the researchers have no plans themselves to turn their formula into some sort of widely accessible calculator, they're open to existing student loan repayment calculators adopting their model so that I can help as many borrowers as possible.
"Right now, students don't really have any kind of concrete or rigorous guidelines--they may just have these general impressions but there's no math to justify those," Huang said. "We have created a simple model, but one that's undergone a very rigorous mathematical treatment."
INFORMATION:
HOUSTON - (June 18, 2021) - To boost employees' creativity, managers should consider offering a set of rewards for them to choose from, according to a new study by management experts at Rice University, Tulane University, the University of North Carolina at Greensboro and National Taiwan Normal University.
The study, co-authored by Jing Zhou, the Mary Gibbs Jones Professor of Management and Psychology at Rice's Jones Graduate School of Business, is the first to systematically examine the effects of reward choice in a field experiment, which was conducted in the context of an organizationwide suggestion ...
MINNEAPOLIS/ST. PAUL (06/18/2021) -- University of Minnesota Medical School researchers determined that the common blood pressure medication, losartan, is not effective in reducing hospitalization for mildly-ill COVID-19 outpatients.
In the multicenter, randomized, double-blinded clinical trial, non-hospitalized patients recently diagnosed with COVID-19 were given either losartan or a placebo and monitored for 15 days. The study's results, which were published in END ...
Left hands and right hands are almost perfect mirror images of each other. But whatever way they are twisted and turned, they cannot be superimposed onto each other. This is why the left glove simply won't fit the right hand as well as it fits the left. In science, this property is referred to as chirality.
Just like hands are chiral, molecules can be chiral, too. In fact, most molecules in the cells of living organisms, such as DNA, are chiral. Unlike hands, however, that usually come in pairs of left and right, the molecules of life almost exclusively occur in either their "left-handed" or their "right-handed" version. They are homochiral, as researchers say. Why that is, is still not clear. But ...
SAN ANTONIO (June 18, 2021) -- Researchers from The University of Texas Health Science Center at San Antonio (UT Health San Antonio) and colleagues worldwide describe a new science-based intervention for hiccups in a research letter published June 18 in the journal JAMA Network Open.
In the publication, the scientists coined a new term for the intervention: the "forced inspiratory suction and swallow tool," or FISST. The team also reported the results of a survey of 249 users who were asked whether it is superior to hiccup home remedies such as breathing into ...
An international team led by researchers at Princeton University has uncovered a new pattern of ordering of electric charge in a novel superconducting material.
The researchers discovered the new type of ordering in a material containing atoms arranged in a peculiar structure known as a kagome lattice. While researchers already understand how the electron's spin can produce magnetism, these new results provide insights into the fundamental understanding of another type of quantum order, namely, orbital magnetism, which addresses whether the charge can spontaneously flow in a loop and produce magnetism dominated by extended orbital motion of electrons in a lattice of atoms. Such orbital currents can produce unusual quantum ...
Cancer cells have an uncanny ability to evolve and adapt to overcome the treatments used against them.
While patient survival has been extended by modern drugs that block the production or action of male hormones that fuel prostate cancer -- androgen receptor inhibitors such as enzalutamide, apalutamide, darolutamide, and abiraterone -- eventually these drugs stop working. At that point, a patient's disease is considered incurable, or what doctors call metastatic, castration-resistant prostate cancer.
In a new study, a team of researchers led by Joshi Alumkal, M.D., who ...
BIRMINGHAM, Ala. - Will a reduction in tau protein in brain neurons protect against Parkinson's disease and Lewy body dementias?
A new study, published in the journal eNeuro, suggests the answer is no. If this is borne out, that result differs from Alzheimer's disease, where reducing endogenous tau levels in brain neurons is protective for multiple models of the disease -- which further suggests that the role of tau in the pathogenesis of Lewy body dementias is distinct from Alzheimer's disease.
Both Parkinson's disease dementia and Lewy body dementia are characterized by intracellular aggregates of misfolded alpha-synuclein protein in brain neurons, and the two diseases together are the second most common cause of neurodegenerative dementia after ...
Lake Victoria, which came under the spotlight in 2004 by the documentary "Darwin's nightmare", is not only suffering from the introduction and commercialisation of the Nile perch. A study lead researchers from the University of Liège (Belgium) has highlighted other worrying phenomena, particularly climatic ones, which have an equally important impact on the quality of the lake's waters.
Located in East Africa, just south of the Equator, Lake Victoria is the source of the Nile and is the largest tropical lake in the world. With a surface area of 68,800 km² (twice the size of Belgium), it is considered to be one of the largest water and fishery resources in East Africa, supporting more than 47 million people in the three neighbor countries ...
Colorado State University Professor of Psychology Silvia Sara Canetto has spent many years researching patterns and meanings of suicide by culture, trying to make sense of the variability in women's and men's suicide mortality around the world. Suicide rates are generally higher in men than in women, but not everywhere - which suggests cultural influences.
Canetto and colleagues have completed a new study that provides insight into what may contribute to men's suicide vulnerability. The study tests Canetto's theory that men's suicide mortality ...
Scientists at Sanford Burnham Prebys have gained a deeper insight into the intricacies of autophagy, the process in which cells degrade and recycle cellular components. The findings, published in Current Biology, describe how the "trash bags" in a cell--called autophagosomes--are tagged to direct their movement to the cellular "recycling plants" where waste is processed. The research opens new paths to understanding the relationship between autophagy and age-related diseases such as cancer and neurological disorders.
"Our latest study identifies how a chemical modification (phosphate-related ...
