Behavioral Effects of Student Loan Repayment Plan Options on Borrowers’ Career Decisions: Theory and Experimental Evidence

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

No 24804, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the effects of available student loan repayment plans on borrowers’ career choices. By removing the risk of loan default, income driven repayment (IDR) plans make higher-paying but riskier jobs more attractive to those with moderate skill levels. We present experimental evidence that student loan recipients consider the repayment plans offered to them as well as the plans available to other borrowers as a reference in their evaluations of loans and careers. Emotions such as regret over a choice that turns out to be suboptimal ex post and relief at being unburdened from having to make a choice that could turn out badly play significant roles in borrowers’ career choices. Compared to giving borrowers a choice between a standard loan repayment plan that requires a fixed amount to be repaid over a shorter period and an IDR plan that protects borrowers from default by linking payments to income, offering only the IDR plan generates notable benefits. Removing the standard plan from borrowers’ choice sets makes remunerative but risky careers more appealing to borrowers and raises their expected net income. Moreover, these effects are strongest when borrowers holding different plans coexist in the population, as in this environment relief from the possibility of being exposed to a regret-triggering situation is most salient.

JEL-codes: C91 D91 I22 (search for similar items in EconPapers)
Date: 2018-07
New Economics Papers: this item is included in nep-exp
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