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

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  • 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.

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," NBER Working Papers 25258, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25258
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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. Ege Aksu & Sidhya Balakrishnan & Eric Bettinger & Jonathan S. Hartley & Michael S. Kofoed & Dubravka Ritter & Douglas A. Webber, 2024. "Navigating Higher Education Insurance: An Experimental Study on Demand and Adverse Selection"," Working Papers 24-07, Federal Reserve Bank of Philadelphia.
    11. Manuel Salas-Velasco, 2024. "Debiasing the availability heuristic in student loan decision-making," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 51(2), pages 501-528, May.
    12. Benjamin M. Marx & Lesley J. Turner, 2019. "Student Loan Choice Overload," NBER Working Papers 25905, National Bureau of Economic Research, Inc.
    13. 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

    JEL classification:

    • I2 - Health, Education, and Welfare - - Education
    • I20 - Health, Education, and Welfare - - Education - - - General
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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