The Importance of “Choice Architecture” for Student Loan Repayment Decisions & Outcomes

The term “choice architecture” applies to a specific decision and encompasses the ways in which different options could be presented to a decision-maker. The choice architecture of student loan repayment could include the number and order of repayment plans shown to a borrower, any information intended to help borrowers compare and contrast their options, and the “default” or repayment plan that is selected when the borrower fails to actively indicate their choice.

Changes to the ways in which student borrowers are informed of their options may affect repayment plan choice and borrowers’ success in paying down their loans:

1. Evidence from an information experiment that presented students with hypothetical loan repayment scenarios suggests that the framing of repayment plan options may affect whether borrowers understand the costs and benefits of choosing the “standard” (fixed amount, 10-year) repayment plan compared to an income-driven repayment (IDR) plan.

2. Evidence from a lab experiment that presented students with different versions of the existing Student Loan Exit Counseling website suggests that many borrowers who would likely benefit from IDR are “defaulted” into the standard 10-year repayment plan because they do not make an active choice when entering repayment.

3. In partnership with a loan servicer, researchers conducted a field experiment in which borrowers were randomly assigned to receive an IDR application that was pre-filled. Results suggest that reducing the cost and complexity involved with applying for IDR by providing assistance with the application can increase IDR take-up for eligible borrowers.