Working Paper: NBER ID: w24804
Authors: Katharine G. Abraham; Emel Filizozbay; Erkut Y. Ozbay; Lesley J. Turner
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.
Keywords: student loans; repayment plans; career choices; behavioral economics; regret; gratitude
JEL Codes: C91; D91; I22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income-driven repayment (IDR) plans (F34) | attractiveness of higher-paying but riskier jobs (J33) |
| removal of the standard repayment plan (G51) | attractiveness of remunerative but risky careers (J44) |
| coexistence of borrowers with different plans (G51) | decision-making (D70) |
| emotional responses to repayment options (G41) | borrowers' choices (G51) |