Designed to Fail: Effects of the Default Option and Information Complexity on Student Loan Repayment
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.
We thank the Russell Sage Foundation for funding through its Behavioral Economics Grants program (Award #98-16-12). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
James C. Cox & Daniel Kreisman & Susan Dynarski, 2020. "Designed to fail: Effects of the default option and information complexity on student loan repayment," Journal of Public Economics, vol 192.