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

45 Pages Posted: 19 Nov 2018

See all articles by James C. Cox

James C. Cox

Georgia State University

Daniel Kreisman

Georgia State University

Susan M. Dynarski

National Bureau of Economic Research (NBER); University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; University of Michigan at Ann Arbor - School of Education

Date Written: November 2018

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.

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Suggested Citation

Cox, James C. and Kreisman, Daniel and Dynarski, Susan M., Designed to Fail: Effects of the Default Option and Information Complexity on Student Loan Repayment (November 2018). NBER Working Paper No. w25258. Available at SSRN: https://ssrn.com/abstract=3286878

James C. Cox (Contact Author)

Georgia State University

Daniel Kreisman

Georgia State University ( email )

Susan M. Dynarski

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
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University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

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University of Michigan at Ann Arbor - School of Education ( email )

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