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Designed to Fail: Effects of the Default Option and Information Complexity on Student Loan Repayment

Author

Listed:
  • 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 sub-optimal plan. 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.

Suggested Citation

  • James C. Cox & Daniel Kreisman & Susan Dynarski, 2018. "Designed to Fail: Effects of the Default Option and Information Complexity on Student Loan Repayment," Experimental Economics Center Working Paper Series 2018-04, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University, revised Mar 2020.
    • Handle: RePEc:exc:wpaper:2018-04
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    Cited by:

    1. Abraham, Katharine G. & Filiz-Ozbay, Emel & Ozbay, Erkut Y. & Turner, Lesley J., 2020. "Framing effects, earnings expectations, and the design of student loan repayment schemes," Journal of Public Economics, Elsevier, vol. 183(C).
    2. Jan-Emmanuel De Neve & Clément Imbert & Johannes Spinnewijn & Teodora Tsankova & Maarten Luts, 2021. "How to Improve Tax Compliance? Evidence from Population-Wide Experiments in Belgium," Journal of Political Economy, University of Chicago Press, vol. 129(5), pages 1425-1463.
    3. Lars Behlen & Oliver Himmler & Robert Jäckle, 2023. "Defaults and effortful tasks," Experimental Economics, Springer;Economic Science Association, vol. 26(5), pages 1022-1059, November.
    4. Philip Armour & Melanie A. Zaber, 2020. "Does Student Loan Forgiveness Drive Disability Application?," NBER Working Papers 26787, National Bureau of Economic Research, Inc.
    5. Marx, Benjamin M. & Turner, Lesley J., 2020. "Paralysis by analysis? Effects of information on student loan take-up," Economics of Education Review, Elsevier, vol. 77(C).
    6. Behlen, Lars & Himmler, Oliver & Jaeckle, Robert, 2022. "Can defaults change behavior when post-intervention effort is required? Evidence from education," MPRA Paper 112962, University Library of Munich, Germany.
    7. Yazan K. A. Migdadi & Ahmed A. Khalifa & Abdullah Al-Swidi & Abdulkarem I. Amhamed & Muftah H. El-Naas, 2022. "A Conceptual Framework of Customer Value Proposition of CCU-Formic Acid Product," Sustainability, MDPI, vol. 14(24), pages 1-21, December.
    8. Katharine G. Abraham & Emel Filiz-Ozbay & Erkut Y. Ozbay & Lesley J. Turner, 2022. "Effects of the Menu of Loan Contracts on Borrower Behavior," Management Science, INFORMS, vol. 68(1), pages 509-528, January.
    9. Holger Mueller & Constantine Yannelis, 2022. "Increasing Enrollment in Income‐Driven Student Loan Repayment Plans: Evidence from the Navient Field Experiment," Journal of Finance, American Finance Association, vol. 77(1), pages 367-402, February.
    10. Benjamin M. Marx & Lesley J. Turner, 2019. "Student Loan Choice Overload," NBER Working Papers 25905, National Bureau of Economic Research, Inc.
    11. Mangrum, Daniel, 2022. "Personal finance education mandates and student loan repayment," Journal of Financial Economics, Elsevier, vol. 146(1), pages 1-26.

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    More about this item

    Keywords

    Student Loans; Default Option; Income Driven Repayment; Experiment;
    All these keywords.

    JEL classification:

    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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