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The Effect of Student Loan Payment Burdens on Borrower Outcomes

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Abstract

Rising student loan debt and concerns over unaffordable payments provide a rationale for the broad class of “income-driven repayment” (IDR) plans for federal student loans. These plans aim to protect borrowers from delinquency, default, and resulting financial consequences by linking payments to income and providing forgiveness after a set repayment period. We estimate the causal effect of IDR payment burdens on loan repayment and schooling outcomes for several cohorts of first-time IDR applicants using a regression discontinuity design. Federal student loan borrowers who are not required to make payments see short-run reductions in delinquency and default risk, but these effects fade or reverse in the longer run as some borrowers become disconnected from the student loan repayment system when not required to make payments.

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  • Tomás Monarrez & Lesley J. Turner, 2024. "The Effect of Student Loan Payment Burdens on Borrower Outcomes," Working Papers 24-08, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:97987
    DOI: 10.21799/frbp.wp.2024.08
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    More about this item

    Keywords

    student debt; inattention; income-driven repayment;
    All these keywords.

    JEL classification:

    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

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