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

James Cox, Daniel Kreisman and Susan Dynarski

Journal of Public Economics, 2020, vol. 192, issue C

Abstract: Within five years of leaving school, 25% of student loan borrowers default on required minimum payments. These defaults are costly: they add to interest and penalties on loans and lower credit scores, which limits access to future credit and can adversely affect job prospects. We ask why so few student loan borrowers enroll in Income Driven Repayment (IDR) plans, which insure against default caused by low earnings. To do so we run an incentivized laboratory experiment using a facsimile of the government’s Student Loan Exit Counseling website. We test the roles information complexity, uncertainty about earnings, and the default option play. We find that switching the default option from the Standard plan with fixed minimum payments to an IDR with income-contingent minimum payments, and providing good information about earnings, can dramatically decrease choice of the risky Standard plan.

Keywords: Student loans; Default option; Income driven repayment; Experiment (search for similar items in EconPapers)
JEL-codes: C91 I22 I28 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Designed to Fail: Effects of the Default Option and Information Complexity on Student Loan Repayment (2020)
Working Paper: Designed to Fail: Effects of the Default Option and Information Complexity on Student Loan Repayment (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:192:y:2020:i:c:s0047272720301626

DOI: 10.1016/j.jpubeco.2020.104298

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