Earnings Expectations, Behavioral Biases, and the Design of Student Loan Repayment Schemes

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 07.03.2017, 12:15 - 13:30


Presentation by 

Katharine G. Abraham (University of Maryland)


Concerns over growing student loan debt, delinquency, and defaults have stimulated proposals to expand income-driven repayment (IDR) plans that link loan payments to borrowers’ earnings. In this project, we investigate the factors that affect students’ loan repayment choices. In a survey of University of Maryland undergraduates, we elicit students’ expectations of future labor market outcomes and preferences for income-driven repayment by presenting students with scenarios in which both the percentage of income that payments represent and the framing of the alternative plan are randomly assigned. We find a strong relationship between the framing of IDR and student preferences, with students significantly more likely to report preferring IDR when the insurance aspect of the plan is emphasized and less likely to prefer IDR when the length of repayment and total interest paid are highlighted. Students who anticipate lower earnings after graduation are more responsive to the framing that emphasizes the insurance aspect of the IDR plan. The information currently provided to students who are considering an IDR plan for repayment of their Federal student loans emphasizes the potential for longer repayment periods and higher total interest payments. Our findings suggest that this may be an important reason for the lower-than-hoped-for take-up of these plans.

For more information, please contact seminar@iza.org