Working Paper: NBER ID: w24484
Authors: Katharine G. Abraham; Emel Filizozbay; Erkut Y. Ozbay; Lesley J. Turner
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.
Keywords: income-driven repayment; student loans; framing effects; labor market expectations; policy design
JEL Codes: D14; D82; H52; H81; I22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| framing of IDR (F33) | loan defaults (G33) |
| insurance framing (G52) | IDR choice (F33) |
| cost framing (D40) | IDR choice (F33) |
| insurance framing + low earnings expectation (G52) | IDR choice (F33) |
| cost framing + low earnings expectation (G19) | IDR choice (F33) |