Study: Simple Language Tweak Can Increase IDR Enrollment, Reduce Defaults

By Allie Bidwell, NASFAA Senior Reporter

A small tweak in the way income-driven repayment (IDR) plans are explained to student loan borrowers could influence more to take advantage of the alternative repayment plans, and potentially reduce defaults down the line, according to a new study.

The working paper, published this week by the National Bureau of Economic Research, surveyed nearly 4,400 University of Maryland undergraduate students between the ages of 18 and 29. The researchers — Katharine Abraham, Emel Filiz-Ozbay, Erkut Ozbay, and Lesley Turner — divided the students into groups and gave them a hypothetical situation in which they were required to choose a standard repayment plan or an IDR plan to repay a certain amount of student debt. For one group, the IDR plan was framed in a way that put more emphasis on the insurance it would provide borrowers in the event they had low or no incomes. For the other group, the IDR plan was framed in a way that emphasized the costs of that option — that borrowers may end up paying more overall than they initially owed or would pay through a standard repayment plan.

Currently, the researchers found, the "framing of available IDR options may discourage borrowers who would most value the insurance aspect of IDR from participating in these plans." The students who were randomly assigned to the group that emphasized the costs of IDR were 50 percent less likely to choose such a repayment plan, the study found. Meanwhile, those assigned to the group that emphasized insurance were more than 60 percent more likely to choose an IDR plan. A $10,000 increase in hypothetical student loan balances also led to a 2 to 3 percentage point increase in the likelihood of selecting an IDR plan.

Although enrollment in IDR plans has been steadily increasing, the plans have long been underutilized, and the national cohort default rate recently increased for the first time in several years. The Government Accountability Office also noted in a 2015 report that 70 percent of borrowers who defaulted on their loans met the income requirements for income-based repayment (IBR), although defaulted loans are ineligible for IBR until they’re rehabilitated.

Some lawmakers and advocates—including NASFAA—have pushed to allow at-risk or delinquent borrowers to be automatically enrolled in an IDR plan, and to make annual recertification automatic, or to allow for multi-year documentation for recertification purposes. Borrowers themselves have also said servicing problems have complicated the process when they initially enroll or recertify their income for IDR plans. Still, most of the highest-risk borrowers are not enrolled in an IDR plan, and about half of those borrowers redefault with time.

"Our findings imply that under the IDR options currently available to U.S. student borrowers, default rates of bachelor’s degree-seeking borrowers could be lowered substantially with little long-term cost to the federal government by emphasizing the fact that IDR provides insurance against unaffordable loan payments," the authors wrote.


Publication Date: 4/11/2018

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