Doctoral Dissertation Research in Economics: Low-Income Expectations and Student Loan Repayment Plan Choice

This award is funded in whole or in part under the American Rescue Plan Act of 2021 (Public Law 117-2).

Most individuals in the United States who attend college borrow money from the Federal government in the form of student loans. After they leave school, borrowers pay back their student loans by making monthly loan payments. The minimum payment Federal student loan borrowers must make is determined by a choice between: (1) a mortgage style repayment plan with fixed monthly payments and (2) income-based repayment (IBR) plans where minimum payments are related to the borrower’s income.

One reason borrowers may choose mortgage style repayment plans rather than IBR plans is mis-judgement of risk of earning a low income. This research will explore whether IBR uptake can be improved by providing information about low-income risk to seniors and juniors in college. The researchers will run an information experiment at a large university in the U.S.

Half of surveyed students will be provided with information on low-income risks tailored to their specific majors. The project will then examine whether provision of the information changes student preferences for IBR plans and how the responses vary by student characteristics. The outcomes of this proposal will improve the understanding of federal student loans and will have potential implications regarding the communication of these loans.

Income-based student loan repayment provides borrowers with insurance against high repayment burdens relative to their income. Students on IBR plans are significantly less likely to default on their student loans. Despite these benefits, most students choose to stay on mortgage style repayment plans where payments do not change with the borrower's income.

This project will explore whether this outcome is partially caused by borrowers having low subjective probabilities of earning a low-income after they graduate. This hypothesis will be tested using a survey experiment fielded to juniors and seniors at a large university in the U.S. Half of survey respondents will be provided the information on the incomes of college graduates with their major.

These students will then be asked about their future income expectations and their choice of student loan repayment plan under a hypothetical borrowing scenario. The results of this project will advance the body of knowledge on federal student loans.

This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.