Behavioral Effects of Student Loan Repayment Plan Options on Borrowers’ Career Decisions: Theory and Experimental Evidence

33 Pages Posted: 16 Jul 2018

See all articles by Katharine G. Abraham

Katharine G. Abraham

University of Maryland - Joint Program in Survey Methodology and Department of Economics; National Bureau of Economic Research (NBER)

Emel Filiz-Ozbay

University of Maryland - College Park

Erkut Ozbay

University of Maryland - Department of Economics

Lesley Turner

University of Maryland

Date Written: July 2018

Abstract

We study the effects of available student loan repayment plans on borrowers’ career choices. By removing the risk of loan default, income driven repayment (IDR) plans make higher-paying but riskier jobs more attractive to those with moderate skill levels. We present experimental evidence that student loan recipients consider the repayment plans offered to them as well as the plans available to other borrowers as a reference in their evaluations of loans and careers. Emotions such as regret over a choice that turns out to be suboptimal ex post and relief at being unburdened from having to make a choice that could turn out badly play significant roles in borrowers’ career choices. Compared to giving borrowers a choice between a standard loan repayment plan that requires a fixed amount to be repaid over a shorter period and an IDR plan that protects borrowers from default by linking payments to income, offering only the IDR plan generates notable benefits. Removing the standard plan from borrowers’ choice sets makes remunerative but risky careers more appealing to borrowers and raises their expected net income. Moreover, these effects are strongest when borrowers holding different plans coexist in the population, as in this environment relief from the possibility of being exposed to a regret-triggering situation is most salient.

Suggested Citation

Abraham, Katharine G. and Filiz-Ozbay, Emel and Ozbay, Erkut and Turner, Lesley, Behavioral Effects of Student Loan Repayment Plan Options on Borrowers’ Career Decisions: Theory and Experimental Evidence (July 2018). NBER Working Paper No. w24804, Available at SSRN: https://ssrn.com/abstract=3214348

Katharine G. Abraham (Contact Author)

University of Maryland - Joint Program in Survey Methodology and Department of Economics ( email )

College Park, MD 20742
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Emel Filiz-Ozbay

University of Maryland - College Park ( email )

College Park, MD 20742
United States

Erkut Ozbay

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Lesley Turner

University of Maryland ( email )

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