Abstract:
Concerns over growing student loan debt, delinquency, and defaults have stimulated proposals to develop and expand income-driven repayment (IDR) plans that link loan payments to borrowers’ earnings. In this project, we investigate the factors that affect students’ loan repayment choices. We test how the framing of the two key features that distinguish income-driven schemes – protection from unaffordable loan payments in periods of low earnings versus potentially higher costs over the life of the loan – affects empirical measures of adverse selection. In a survey of University of Maryland undergraduates, we elicit students’ expectations of future labor market outcomes and preferences for income-driven repayment by presenting students with scenarios in which both the percentage of income that payments represent and the framing of the alternative plan are randomly assigned. Consistent with adverse selection, students who expect to have better labor market outcomes are less likely to prefer IDR. We also find a strong relationship between the framing of IDR and students preferences, with students significantly more likely to report preferring IDR when the insurance aspect of the plan is emphasized and less likely to prefer IDR when the length of repayment and total interest paid are highlighted.