Designed to fail: Effects of the default option and information complexity on student loan repayment

Abstract

We ask why so few student loan borrowers enroll in Income Driven Repayment when the majority would benefit from doing so. To do so we run an incentivized laboratory experiment using a facsimile of the government's Student Loan Exit Counseling website. We test the role information complexity, uncertainty about earnings, and the default option play. We show that despite an ex ante optimal choice, the majority choose, or are defaulted into, a sub-optimal plan. We find the default option is a driver of this phenomenon, suggesting the government has an easy policy lever to lower default rates-change the default plan.

Borrow now, pay even later: A quantitative analysis of student debt payment plans

“…Karamcheva et al (2020) document that although the majority of borrowers enrol in the default standard repayment plan, incomedriven plans have gained popularity in recent years. The evidence suggests that directly offering the income-driven plans to borrowers an alternative to the default plan increases enrolment (Abraham et al, 2020;Cox et al, 2020;Mueller and Yannelis, 2022) (in line with similar behavior on interest-free student loans documented by Cadena and Keys (2013)), but there are important non-monetary costs which deter enrolment in income-driven plans (Lochner et al, 2021). Maggio et al (2020) find large benefits from the discharge of student debt in a natural experiment.…”

College Costs, Financial Aid, and Student Decisions

“…In this context, many researchers and policymakers have been puzzled by the relatively low takeup in the U.S. of these apparently highly beneficial IDR plans. Another recent paper by Cox et al (2020) provides a plausible explanation: borrowers are heavily influenced by the default (i.e., status quo option) repayment plan when making their initial choice of plans. Using an incentivized lab experiment, the authors find that hypothetical enrollment in the Standard (10-year, mortgagestyle) repayment plan drops by nearly half -from 63% to 34% -when the default option is changed from the Standard plan to an IDR plan.…”

Percepciones sociales frente al crédito y el acceso a la educación superior en Colombia: Una aproximación polifónica

“…Ahora bien, alrededor del ICETEX (y en general de los préstamos educativos) se han suscitado distintas ideas, positivas y negativas, que se han instalado en los imaginarios colectivos de diferentes grupos y poblaciones (Muñoz Varón, 2009;Cox, Kreisman y Dynarski, 2020). Lo anterior cobra especial relevancia si se lo mira a través del concepto de «representaciones sociales», originalmente descrito por Moscovici (1961) y fundamentado en la idea de Durkheim (1898) de que la conciencia colectiva va más allá de los individuos y que, como estos enfrentan una misma realidad, comparten conocimientos dentro de su comunidad a partir de interacciones sociales (Pimentel, da Silva y Pichelli, 2022).…”