NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Designed to Fail: Effects of the Default Option and Information Complexity on Student Loan Repayment

James C. Cox, Daniel Kreisman, Susan Dynarski

NBER Working Paper No. 25258
Issued in November 2018
NBER Program(s):Children, Economics of Education, Labor Studies, Public Economics

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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Document Object Identifier (DOI): 10.3386/w25258

 
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