Working Paper: NBER ID: w25258
Authors: James C. Cox; Daniel Kreisman; Susan Dynarski
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 plan that offers no protection against default. 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; income-driven repayment; default option; behavioral economics
JEL Codes: I21; I22; I23; I28; J01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Default option (Y20) | Borrowers' choices regarding student loan repayment plans (G51) |
| Changing the default option (Y60) | Better decision-making outcomes (D91) |
| Default option interacts with information provided (Y20) | Borrowers' choices regarding student loan repayment plans (G51) |