Principal investigator: Viviane Pires Ribeiro
Article title: STUDENT LOAN NUDGES: EXPERIMENTAL EVIDENCE ON BORROWING AND EDUCATIONAL ATTAINMENT
Article authors: Benjamin M. Marx and Lesley J. Turner
Location of the intervention: United States
Sample size: 18.800 subscriptions
Sector: Education
Type of InterventionEffects of student loans
Primary variable of interest: Student Loans
Evaluation method: Others Field experiment
Evaluation Context
In the United States, student enrollment has increased by more than 30% since 2000. Several studies provide evidence that community college students receive substantial returns in the job market. While some grant programs help low-income students enter and complete their studies, the design of federal student aid programs can make it difficult for students to access these resources. Thus, even though the federal government subsidizes loans for low-income students, it also encourages colleges to discourage borrowing, and there is little empirical evidence on the effect of borrowing on student outcomes to guide policy.
Student loan debt in the United States has grown steadily over the past decade, reaching $1,34 trillion in 2017. Despite the fact that community college students have greater financial needs and are less likely to take out loans than students at private and more selective institutions, efforts to reduce borrowing have been especially pronounced within this sector.
Intervention Details
Marx and Turner (2019) study the effect of student loan offers on borrowing and educational attainment with a field experiment at a large community college. The experiment was implemented at “Community College A” (CCA), an anonymous community college, during the 2015-2016 academic year. CCA’s costs are comparable to the costs faced by college students nationwide. For example, in the college district, tuition for the 2014-2015 academic year was approximately $3.100 versus $3.249 nationwide. As with most community colleges, prices depend on residency and are a linear function of credits taken. Community College A It has a significantly larger student body than the average community college, with 18.800 enrollments compared to an average of 4.300 over the 12-month period. Financial aid receipts are similar among CCA students and other community college students. Approximately 45% of CCA students received Pell Grant aid and 25% received federal loans in 2013-2014, compared to 41% and 19% of community college students, respectively.
Students at CCA have substantially lower graduation rates and slightly worse job market outcomes than the average community college student. Only 5% of CCA students completed a credential within 150% of the waiting time, compared to 21% of students nationwide. Average earnings among federal aid recipients who were no longer enrolled ten years after entry are similar for CCA and community colleges nationwide (approximately $28.000 and $30.253, respectively). Other outcomes follow similar patterns, with CCA students experiencing worse job market outcomes than national averages.
During the 2014-2015 academic year, CCA offered loans to all students with less than $25.000 in federal student loan debt. All students who listed CCA on their free application for Federal Student Aid (FAFSA) received financial aid electronically through a web-based system. In addition to federal requirements, CCA students had to confirm their eligibility for the loan and the loan amount via an electronic form. CCA's eligibility criteria and application procedures were unchanged for the experience, meaning the default loan amount was $0.
Methodology Details
To provide evidence on the causal effect of student loans on educational achievement, Marx and Turner (2019) used experimental variation that mirrors the most common practices of community colleges. While many federal student loan features, such as maximum amounts and eligibility requirements, are applied uniformly to students and institutions, colleges have criteria regarding whether to include loan “offers” in student financial aid award letters. Listed loan amounts, commonly referred to as “offers,” do not alter the students’ choice set, but they can affect borrowing through choice architecture, that is, the design of the decision-making environment.
The experiment applied random assignment of loan offers to students. On a daily basis, beginning in May 2015, the CCA financial aid office provided data on each batch of students for whom a loan offer letter was generated the following day. The experimental sample included all students eligible for financial aid. Students were assigned to either the treatment group or the control group using stratified randomization based on Expected Family Contribution (EFC) boxes and all possible combinations of binary variables for freshman versus senior, dependent versus independent, and with versus without student loan debt.
Results
Students were randomly assigned to receive a loan offer of $0, or an offer of $3.500 (for “freshmen” who had accumulated fewer than 30 credits), or $4.500 (for upperclassmen). Students who received a non-zero loan offer were 40% more likely to take out a loan than those who received a $0 offer, with each additional borrower taking out a $4.000 loan on average. Non-zero loan offers also generated considerable gains in educational achievement.
Loan offers other than zero were randomly assigned, generating a 40% increase in the probability of loans. This effect is greater than the changes in loans produced by more onerous, intensive interventions and is consistent with previous evidence that student loan decision-making is disproportionately affected by information and administrative costs imposed when making such decisions. The experimental results suggest that the cost of collecting information on loan availability contributes to the fixed cost of borrowing.
Students prompted to request loan suggestions received, on average, 3,7 additional credits and improved their grades by 0,6 points in the year of the intervention. In the following academic year, they were 11 percentage points (178%) more likely to transfer to a four-year public institution. The authors estimated that non-zero loan offers increased the short-term achievement of community college students. However, it cannot be concluded that offering a non-zero loan improves the well-being of each student, but it was projected that the average responder benefits financially from the loan, even with a discount rate as high as 12%. Using a simple theoretical model that allows for important effects, information costs, and default bias, the authors provide evidence on the channels through which non-zero offers affect student behavior. The pattern of responses suggests that at least 78% of loan responses are driven by a reduction in information costs, suggesting that non-zero offers improve the well-being of most students.
Lessons in Public Policy
Marx and Turner (2019) emphasize that the study's results are relevant for colleges, policymakers, and future research on the effects of "nudges." In the United States, more than five million students attend colleges that do not offer loans under financial aid grant letters, and nearly one million students attend colleges that do not participate in federal loan programs. The analysis suggests that offering loans to students enrolled in these colleges can generate substantial increases in educational achievement. The authors show that the nudges These methods can affect behavior by communicating information more effectively than other methods used to convey the same information. Students appear to benefit substantially from clear communication of loan opportunities when making loan decisions and, therefore, being informed of their range of options. At the same time, making a better choice within that range also requires knowledge of expected costs and benefits. Future research could examine how to help each student obtain a loan amount that best meets their needs.
References
Marx, B. M., & Turner, L. J. (2019). Student Loan Nudges: Experimental Evidence on Borrowing and Educational Attainment. American Economic Journal: Economic Policy, 11 (2), 108-141.
