  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
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 non-capitalization 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.
