The effect of reduced student loan borrowing on academic performance and default: Evidence from a loan counseling experiment

Abstract

Student loan borrowing for higher education has emerged as a top policy concern. Policy makers at the institutional, state, and federal levels have pursued a variety of strategies to inform students about loan origination processes and how much a student has cumulatively borrowed, and to provide students with greater access to loan counseling. We conducted an experiment to evaluate the impact of an outreach campaign that prompted loan applicants at a large community college to make informed and active borrowing decisions and that offered them access to remote, one-onone assistance from a loan counselor. The intervention led students to reduce their unsubsidized loan borrowing by 7 percent, resulted in worse academic performance, and increased the likelihood of loan default during the three years after the intervention occurred. Our results suggest policy makers and higher education leaders should carefully examine the potential unintended consequences of efforts to reduce student borrowing, particularly in light of growing evidence regarding the counter-intuitive positive relationship between reduced borrowing levels and worse student academic and financial outcomes.

Like Any Other Trap: The Circuitous Path of Student Loan Repayment

“…In a randomized study, Marx and Turner (2019) find that higher loan offers increase borrowing and grades, credits earned, and transfers to 4-year institutions. Black et al (2020) find that greater loan availability enables students to borrow more and improves short-term academic attainment (congruent with Barr et al, 2019, andWiederspan, 2016) and longer-term outcomes, including degree completion, earnings, and financial well-being.…”

“…For most borrowers, federal student loans carry a mortgagelike repayment schedule of 10 years with fixed payments. However, these loan terms do not match most individuals’ life course and earnings trajectory (Barr et al, 2019; Chapman & Dearden, 2017), resulting in frequent deviations from these loan terms. Most research focuses on one of the most disruptive events that student borrowers face—default.…”

Do Academically Struggling Students Benefit from Continued Student Loan Access? Evidence from University and Beyond

“…3 Given the prevalence of loan-financed education, the number of studies investigating the effects of student loans is remarkably small compared to other forms of financial aid. Most student loan studies in the U.S. focus on community colleges and generally find positive effects on academic performance (Barr, Bird, and Castleman 2019;Marx and Turner 2019;Wiederspan 2016). For university students, Black et al (2020) find that access to higher federal student loan limits increases bachelor's degree completion rates for students in Texas.…”

Taking it to the Limit: Effects of Increased Student Loan Availability on Attainment, Earnings, and Financial Well-Being

“…12 For example, Feiveson et al (2018) provide an overview of student lending and possible threats to the macroeconomy and financial stability. 13 See, for instance, Dunlop (2013); Wiederspan (2016); Solis (2017); Barr, Bird, and Castleman (2019); Denning (2019); and Marx and Turner (2019). 14 While many papers examine one or two of these outcomes, we are unique in our ability to examine all of them.…”