This is a study of the effects of available student loan repayment plans on
borrowers’ career choices. By removing the risk of loan default, income
driven repayment (IDR) plans make higher-paying but riskier jobs more
attractive to those with moderate skill levels.
The authors present experimental
evidence that student loan recipients consider the repayment plans
offered to them as well as the plans available to other borrowers as a
reference in their evaluations of loans and careers. Emotions such as
regret over a choice that turns out to be suboptimal ex post and relief
at being unburdened from having to make a choice that could turn out
badly play significant roles in borrowers’ career choices. Compared to
giving borrowers a choice between a standard loan repayment plan that
requires a fixed amount to be repaid over a shorter period and an IDR
plan that protects borrowers from default by linking payments to income,
offering only the IDR plan generates notable benefits. Removing the
standard plan from borrowers’ choice sets makes remunerative but risky
careers more appealing to borrowers and raises their expected net
income. Moreover, these effects are strongest when borrowers holding
different plans coexist in the population, as in this environment relief
from the possibility of being exposed to a regret-triggering situation
is most salient.
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