Financial literacy · Hard · 30 marks
IEO past paper: 2025 International Economics Olympiad, open questions
Open Question 3. Economics of Student Debt
In many countries, student debt has grown dramatically. In the US, it went up from $480 billion in 2006 to $1.8 trillion in 2025. In the UK, it grew 4.7 times in just the last 11 years (from £62bn in 2014 to £292bn in 2025). While intended to expand access to education, this debt now carries significant consequences for graduates and the broader economy. This question explores those impacts.
(a) Congratulations! You are admitted to Harvard and approved for a student loan to finance tuition ($60,000 per year), room and board ($20,000 per year), and other expenses ($7,000 per year) for four years. The loan has an annual interest rate of 8% and must be repaid in equal annual payments over 30 years after graduation (assume there is no interest while you are in college; the first payment happens 5 years from now).
Explain why your annual payments are $30,912. [5] marks (b) After obtaining your Economics major, you found a great job paying $100,000 per year. Your average income tax rate is 25%. What percentage of your after-tax income will go to your student loan payment? [3] marks (c) Explain two reasons why a high student debt burden might negatively affect a graduate's ability to accumulate wealth over their lifetime. [6] marks (d) Now consider alternative ways of financing education for students who cannot afford it with their family wealth. Suppose the government decides to provide free education for all students from families with incomes below a certain threshold. Describe how it changes the incentives of the universities. [6] marks (e) To pay for the education, the government decided to increase income tax to 50% for high-income earners (starting at $100k a year). Unfortunately, higher taxes have reduced the expected economic growth from 3% to 1% a year. Assume that a typical working span is 45 years and calculate the value of after-tax salaries under the educational loans (starting salary $100k, grows at 3% for 45 years, tax 25%, minus the loan repayments) and then compare it with the government-funded education (starting salary $100k, grows at 1% for 45 years, tax 50%, no loan repayments). Discount at 8%. Explain which one is better for you. [10] marks
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