How A Simple Change Could Help Reduce Student Loan Defaults; GSU Researchers Study Options
Almost a quarter of college students who take out loans are expected to default within four years of leaving school, according to U.S. Education Department data. However, researchers at Georgia State University may have found a way to ease the default rate.
Daniel Kreisman is an assistant professor of economics at GSU. He and James Cox, the Noah Langdale Jr. Chair in Economics at the Andrew Young School of Policy Studies, found the majority of borrowers took out standard loans with 10-year fixed repayment plans. Kreisman said income-driven plans are a safer choice for most students.
“They tie your monthly repayment amount to your earnings,” Kreisman said. “So, if you earn very little, you don’t owe anything. If you’re unemployed, you don’t owe anything.”
Interest on the loan would still accrue, he said, but the borrower is protected from delinquency and default. Defaulting on a loan can affect a borrower’s credit. It can make it difficult to buy a house or car or get a job.
Kreisman and Cox set out to figure out why the majority of borrowers chose fixed repayment plans.
“We said, ‘Well, maybe the reason people aren’t signing up is because the default option is nudging them into the wrong thing,’” Kreisman said.
They were right. The menu on the federal student loan website defaults to a fixed repayment plan. During an experiment, Kreisman and Cox changed the pre-selected plan to an income-driven plan.
“What we found was when we changed the default option, we saw a huge shift from people who went from the standard repayment plan to one of the income-driven ones.”
They tested out some other potential hurdles, like simplifying the language on the loan repayment agreements. However, nothing had the same effect as changing the default option on the federal student loan website.
“If the government is really interested in having kids in these plans, which they are … a really simple thing to do is to put as the default the one you want them to be in,” Kreisman said.
While this won’t solve the student loan crisis or curb the cost of college, Kreisman says it could be a quick fix for student loan repayment.
Editor’s note: This story has been updated.