The problem: Approximately 750,000 Coloradans are laden with nearly $ 28 billion in student loan debt, according to the Attorney General.
One solution: ask local mathematicians what is the cheapest way to pay off the debt.
Yu-Jui Huang, Assistant Professor of Applied Mathematics at CU, worked with Paolo Guasoni, Director of Mathematical Sciences at Dublin City University in Ireland, on a study to find out how best to pay off borrowers’ ever-increasing student loan debt . Saeed Khalili, a research fellow at the CU in the mathematics department, supported the study, which was published this year in the journal Society for Industrial and Applied Mathematics.
Of the 750,000 Coloradans who are on student debt, more than 100,000 are in arrears and failing to make their loan payments, said Kelsey Lesco, Colorado student loan ombudsperson with the prosecutor’s office.
“We often see student debt as just a financial problem, but it’s a human problem,” said Lesco. “People are not all in debt. They delay the marriage. You are unable to have children. You are unable to pass a credit check to get a job. It’s a huge problem. “
Huang and his colleagues used mathematical modeling to calculate the most cost-effective strategy for paying back student loans. Guasoni, originally from Italy, and Huang, who grew up in Taiwan, said they hail from countries with virtually no student debt. It is of interest to both mathematicians to watch the rising debt burden on colleges in the United States, they said.
U.S. student loan debt surpassed $ 1.7 trillion in 2021, displacing auto loans and credit cards among the financial burdens that weigh on tens of millions of Americans, according to Federal Reserve data. These debts have a ripple effect that causes borrowers to delay home buying and starting families.
“It’s quite remarkable how much debt the new generations will be when they graduate from college – a debt that has never existed in any other society,” said Guasoni. “There is a lot of misunderstanding about how these loans work and there is not enough information on how to manage these loans.”
Guasoni and his team set out to fill the information gap.
They found that income-based repayment plans, which are options that set your monthly federal student loan payment based on income and family size, aren’t always in the borrower’s best interests.
“The optimal strategy for some borrowers is to repay large amounts early in the loan term and postpone taking up an income-based repayment plan until a later date,” said Guasoni. “It’s a simple change in strategy, but just like extending a mortgage to get a lower interest rate, it can make a huge difference and result in savings of tens of thousands of dollars over time.”
That option is most beneficial for students with great credit, Huang said, such as those with advanced degrees in courses like dentistry, medicine, or law who tend to owe more than $ 100,000 in debt.
There are also various lending programs available that promise to waive the remaining balance of qualifying loans if borrowers meet certain requirements and make consistent payments, but Guasoni said until the government issues the loans – sometimes decades after they close – the balance can go up more increases than $ 1 million in compound interest and is subject to income tax greater than 40%.
“The year that your student loan is waived, you actually have to pay taxes as if you received the waived amount as income that year,” Guasoni said. “If you let your student loan increase over time, the tax debts are so high that you would have better paid off the loan faster in the first place. Such taxes can reach hundreds of thousands of dollars on large student loans. “
The exact calculation that allows borrowers to pluck the terms of their loan can be found in the journal article.
The formula uses the repayment term, income tax rate, student loan interest rate, and the borrower’s next most expensive loan interest rate to calculate a number. If the number is negative, mathematicians suggest embarking on an income-based repayment plan right away. If positive, it represents the number of years to wait before being included in a plan, with the borrower should repay as much as possible in the meantime.
As an example, the researchers looked at a dental school graduate who owes $ 300,000 at the usual 7.08%. Maintaining maximum payments based on an assumed starting salary of $ 100,000 to repay the loan as quickly as possible results in a total loan cost of $ 512,000, researchers found. Signing up for an income-based repayment plan immediately to keep payments lower adds a total of $ 524,000 in borrowing costs when taxes are added to the waived amount. Using the formula suggested by the researchers results in the lowest total borrowing cost of $ 490,000 – a savings of $ 34,000.
Huang noted that if a student loan is less than $ 50,000, it is likely more cost effective to sign up for an income-based plan.
RJ Sangosti, The Denver Post
Yu-Jui Huang, assistant professor of applied mathematics at the University of Colorado Boulder, was working on a study on the most cost-effective way to repay student loans. Huang is pictured here in his home office in Boulder on June 14, 2021.
Megan Smith, a Denver physical therapist, said she owed more than $ 100,000 in student loans after completing her bachelor’s degree in Minnesota and her PhD in physical therapy from the University of Colorado’s Anschutz Medical campus in 2016.
“It’s an amazing and almost unreal sum,” said Smith. “When you’re younger, the student loans you accept feel like fake money. It doesn’t really register what it’s going to bring with it. You’re only signing up for them to complete the next step in college. “
Smith pays more than $ 500 a month for her student loans through the Income-Based Payment Plan. Without this plan, she said, her monthly payments would exceed her rent.
“I’m not even paying enough to make a dent,” said Smith. “I owe more now than I did when I graduated.”
The mathematicians’ research finds that while student loans can expand access to higher education, recent studies have shown that higher student loan balances contribute to reductions in home ownership and entrepreneurship, delayed marriages, deferred parenting, and increased parental returns.
“The interaction between student loans and tuition fees is also controversial,” the research paper said, adding that research has shown that an increase in student loans leads to an increase in tuition fees. “This suggests that colleges (and not students) could be the beneficiaries of much of the government loan grants.”
Thomas Hernandez, interim director of financial aid and scholarships at the Metropolitan State University of Denver, wants more education in financial literacy at the high school level. Meanwhile, he said it was imperative for colleges to educate students about their financial support, especially at institutions like MSU Denver, where so many students are first-generation college goers.
Any student borrowing a federal loan must take a counseling course at MSU Denver to understand what they’re enrolling for, and the institution offers financial literacy courses year round.
The state also encourages borrowers who have questions or concerns about their student loans to contact Lesco and her colleagues at the Attorney General’s Office.
“Asking a 21-year-old woman to make a big life decision when she doesn’t really understand the big life decision is not great,” said Smith, who feels that traditional rites of passage like home ownership are being undermined by student debt. “I wish I had known more about what I was getting myself into.”