Framing Effects, Earnings Expectations, and the Design of Student Loan Repayment Schemes

Katharine Abraham, Emel Filiz-Ozbay, Erkut Ozbay and Lesley Turner

No 24484, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Income-driven student loan repayment (IDR) plans provide protection against unaffordable loan payments and default by linking loan payments to borrowers’ earnings. Despite the advantages IDR would offer to many borrowers, take-up remains low. We investigate how take-up is affected by the framing of IDR through a survey of University of Maryland undergraduates. When the insurance aspects of IDR are emphasized, students are significantly more likely to participate, while participation is significantly lower when costs are emphasized. IDR framing interacts with expected labor market outcomes. Emphasizing the insurance aspects of IDR has larger effects on students who anticipate a higher probability of not being employed and/or low earnings at graduation. In contrast, when costs are emphasized, IDR take-up is uncorrelated with students’ expected labor market outcomes. Simulation results suggest that a simple change in the framing of IDR could generate substantial reductions in loan defaults with little cost to long-run federal revenue.

JEL-codes: D14 D82 H52 H81 I22 (search for similar items in EconPapers)
Date: 2018-04
New Economics Papers: this item is included in nep-ias
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Published as Katharine G. Abraham & Emel Filiz-Ozbay & Erkut Y. Ozbay & Lesley J. Turner, 2020. "Framing effects, earnings expectations, and the design of student loan repayment schemes," Journal of Public Economics, vol 183.

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