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Abstract

The Federal Government would enjoy reduced “special allowance" payments to lenders in the Guaranteed Student Loan program if borrowers prepaid their loans. This article investigates the extent to which borrowers might be induced to prepay by an offer from the Government to share a portion of its savings expected from prepayment. The analysis suggests that potential savings are not likely to be large enough to induce significant prepayment and that, accordingly, establishment of a prepayment program is not likely to be cost effective. A longer version of this paper, with full derivation of the model used, is available from the author on request.

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