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Designed to Fail: Effects of the Default Option and Information Complexity on Student Loan Repayment

James Cox (), Daniel Kreisman () and Susan Dynarski

No 2018-04, Experimental Economics Center Working Paper Series from Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University

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.

Keywords: Student Loans; Default Option; Income Driven Repayment; Experiment (search for similar items in EconPapers)
JEL-codes: I22 I28 C91 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp
Date: 2018-09
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