Study: Standard Option for Student Loan Repayment Sets Borrowers Up for Failure

By Allie Arcese, Director of Communications

By Allie Bidwell, NASFAA Senior Reporter

The federal government’s standard option for student loan repayment plans may have a hand in driving more borrowers into default, according to a new study released this week.

To study the phenomenon, the researchers—James Cox and Daniel Kreisman of Georgia State University, and Susan Dynarski of the University of Michigan—created an exact replica of the Department of Education’s (ED) Student Loan Exit Counseling website and tested what role the existence of the default option, inaccurate information about future earnings, and information complexity play in borrowers’ decision-making. The study, published in the National Bureau of Economic Research, found that the 10-year standard repayment plan that federal student loan borrowers are automatically enrolled in “has a dominant effect on borrowers’ choices.”

The findings add to a body of research showing not only that income-driven repayment (IDR) plans are underutilized, but also that most defaulted borrowers met the criteria for enrolling in such a repayment plan. A 2012 study from the Department of the Treasury found that 70 percent of defaulted borrowers would have qualified to enroll in an IDR plan, and that the default rate among those in IDR plans was just 1 percent. By comparison, the most recent federal data on the national cohort default rate showed that 10.8 percent of borrowers who entered repayment in fiscal year 2015 defaulted within three years.

In their experiment, the researchers used the standard 10-year repayment plan as their baseline and changed the default option to the Revised Pay As You Earn (REPAYE) plan to determine whether simply changing the default option would lead borrowers to make different choices. They also changed the way information about future earnings is given to students for some subjects, and reduced the complexity of information for some subjects.

Overall, however, they found that the default repayment plan option had the strongest effect on borrowers’ choices, and that providing more clear information about future earnings, and reducing the complexity of information and choices had little effect on borrowers’ decision making.

They found that while 60 percent of borrowers in the baseline group chose the standard repayment plan, just 34 percent chose it when the default option was changed to an IDR plan.

“This suggests that the government has a very easy policy lever to pull if it wants to increase uptake of income-driven repayment plans,” they wrote.

They also found that reframing the way IDR plans are explained to borrowers—from a plan that could lengthen repayment time to one that provides protection for times of low earnings or unemployment—leads to increased enrollment.

The researchers argued the findings could speak to the value of higher education at a time when many claim there is a growing student loan crisis and the return on investment for a college degree might not be worth the cost.

“Part of this is simply due to high variability in earnings in early careers, even for college graduates; and part of it is due to the fact that returns to schooling accrue over a lifetime, not immediately after graduation,” they wrote. “Hence, offering flexible repayment plans that vary with earnings makes sense, both for borrowers and lenders. The problem then is not that these programs are not offered, but rather that [they] are not utilized.”

While some might argue that automatically placing borrowers in the standard 10-year repayment plan might be beneficial in reducing their overall repayment time and possibly the cumulative amount repaid, the authors argue that may not be the case.

“Given these facts, it appears that there is potential to reduce default rates simply through a change in the default option,” they wrote. “From a policy perspective, this need not be controversial. … Legislative efforts in the U.S. to shift to an income based repayment scheme have gained little traction. Past efforts to nudge borrowers into income driven plans has seen limited success. But none of these reform policies has shifted the default option.”


Publication Date: 11/21/2018

Denise D | 11/21/2018 10:23:58 AM

I think the results of this study confirms what every financial aid officer who works with student loans already knew--that students are not getting the right counseling or help from the loan servicers. We all know that some plans are better than others for certain students and that the 10-year plan is the one that is going to have the highest monthly payment but lowest overall cost. However, most students lose touch with their financial aid officers after they leave, and their situations may change further on into their repayment periods. From my experience, the counseling they receive from the loan servicers is sorely lacking, as the servicers just want to get the students to pay enough to catch up rather than working with the borrowers on a plan the they can live with--not just now, but in the future. I realize this is time consuming, but with the amount the students are charged in fees and interest, the money should be there to provide good counseling.

I do comprehensive group exit counseling sessions and I let my students know that they can always come back if they need more information or help with a student loan no matter how long they've been out of school--and I have students take advantage of that offer. Consequently, I have a very low delinquency and default rate, even though my students have a high debt load. Students can also come back for help with job hunting, resume preparation, etc. I know that not all schools are equipped to do these things, but if the feds provided funding from the fees and high interest they are collecting to the schools, schools could hire staff to do more counseling. Otherwise the feds should provide the services themselves or through the loan servicers. That way, students could go from program to program as their needs and objectives change and do so without messing up their credit, which we know has an effect on many other aspects of their lives.

Joel T | 11/21/2018 9:0:32 AM

This would be another article where I would say that NASFAA should dig a little deeper and talk to its members. Based on our experiences with students, some students have found that the income based option works best for them as they start their careers and do not have a lot of expendable income. Others have shown that they strongly prefer the standard payment because they want to know what their budget will look like from year to year. The standard payment provides consistency and the ability to predict expenses from one year to the next when making long term budgetary decisions - like when buying a car or house - and this is appealing to a large population.

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