What’s the best way to pay off student loans? The answer: math.
Here’s what you need to know – and what it means for your student loans.
When considering the best way to pay off student loans, it may seem obvious that the best strategy would involve math. After all, student loans, money, and math seem to go hand in hand. However, researchers at the University of Colorado at Boulder determined that the best way to pay off student loans was to use a mathematical model.
The best way to pay off student loans
Here’s what the researchers found on the best way to pay off student loans. According to their research:
- If you have a small student loan balance, traditional advice recommends paying off student loans as quickly as possible;
- If you have a large student loan balance, traditional advice recommends paying off student loans through an income-based repayment plan;
- However, the best strategy for paying off student loans is to combine the two methods;
- Pay off as much of your student loans as possible in the first few years, then sign up for an income-based repayment plan;
- With an income-based repayment plan, you can get a student loan forgiveness after 20 years (undergraduate student loans) to 25 years (graduate student loans);
- You should switch to an income-based repayment plan once you’ve reached the “critical horizon,” which researchers define as “the point at which the benefits of the remission match the costs of funding”; and
- Then pay the minimum student loan payment each month until you get your student loan forgiveness.
- The goal, the researchers said, is to minimize compound interest charges and maximize student loan forgiveness.
Paying off student loans: considerations and limitations
There are important considerations regarding this student loan repayment strategy.
- Federal student loans: First, this model only applies to federal student loans. Why? There is no income-based repayment plan offered by the federal government for private student loans.
- Income Based Repayment Plans: Second, there may be discrepancies between different income based repayment plans such as IBR, PAYE, REPAYE and ICR. Your personal financial information can affect the optimal repayment plan.
- Student loan refinancing: This student loan repayment plan only applies to income-based repayment plans and does not include student loan refinancing. If you can refinance student loans, you may be able to save more money and pay off student loans faster. Student loan refinancing rates are currently at their lowest.
Researchers must also take into account the unique circumstances of each borrower. Borrowers could refine their model in the future to incorporate inputs such as income and living expenses expected from the borrower and whether they are married or have children. This could change a borrower’s ability or motivation to repay student loans at a certain rate, for example, which could impact the mathematical model.
Student loans: final thoughts
What’s the best way to pay off student loans? It depends. Some borrowers are waiting for their student loan to be canceled. (President Joe Biden has already canceled $ 3 billion in student loans). However, there is growing concern that the cancellation of student loans has been reversed. Other student loan borrowers are proactive in making additional payments for their student loans, while others are refinancing. The bottom line is that this mathematical model is only a student loan repayment model. Most student loan borrowers cannot afford to pay off a large portion of their student loans after graduating from college. There are also other variables such as your income, family size, career, monthly cash flow, life circumstances, for example, which can affect student loan repayment. While it may be “math” based, it’s important to remember that your student loans are unique to you. Do what’s right for your personal financial situation. Here are some popular options to consider: