The Issue
Student loans are an increasingly necessary tool to help students pay for college. Americans have now accumulated more than $1 trillion in student loan debt. Thirty-five percent of all undergraduate students and 55 percent of all graduate students receive some type of federal loan. In 2013, the amount of money borrowed through federal loan programs was approximately $106 billion.
In reality, these numbers understate student debt, since they don’t include private or institutional loans. As the costs of attending college rise, outpacing grant-based aid, low- and middle-income students face tough choices. They can borrow to finance their degrees, attend college part time while working full time, delay college entry while saving for college, or not attend at all.
The Challenge
This paper is meant to help policymakers better understand the decisions individuals make regarding student loans. Specifically, the paper addresses two problems with the current system:
- Loan aversion: The fact that some students want to invest in higher education but are unwilling to use student loans to finance that investment.
- Poor choices about loan repayment: When entering repayment, some borrowers choose plans that harm their long-term finances or assume income levels that are unrealistic for a recent college graduate.
The Recommendations
Applying lessons from behavioral economics, we offer six policy recommendations to help students combat these problems and repay their debt:
- Reduce the number of repayment options.
- Provide repayment information in high school.
- Move to a uniform passive repayment system.
- Make an income-contingent repayment plan the default option.
- Change the name and description of the income-contingent repayment plan.
- Remove the principal balance of the loan.
These recommendations cannot solve the underlying issue of college affordability. But they’re a helpful starting point for discussions about making student loan debt more manageable.