Prof. Castleman: Student Loans, No Simple Nudge


This article was originally authored by Professor Ben Castleman and posted on the Brown Center Chalkboard with the Brookings Institution: “When it comes to student loans, there’s no simple nudge.

Never before has the topic of student loans featured so prominently in the nascent stages of a presidential campaign. Nearly every major candidate has publicly addressed how they would help Americans better manage their student debt, with policy prescriptions ranging from making college debt-free for all students to simplifying and expanding access to income-based repayment options.

What is often overlooked in the rhetoric about student debt, however, is the question of how we can help students make informed borrowing decisions in the first place. Making strategic investments at the front end of the process to help students borrow amounts that are well-suited to their personal circumstances could help reduce downstream challenges with repayment or debt management.

Choosing whether and how much to borrow is a highly complex decision to navigate. In an ideal decision-making process, students would simultaneously consider a multitude of important factors—like the probability that they will graduate from the college where they’re planning to enroll; the earnings return they can expect from a degree in their field of study; the likelihood that they will stay motivated and focused on coursework even when faced with many competing interests for their time and attention—and borrow if the benefits of doing so outweigh the costs.

As work in behavioral economics and psychology has demonstrated, though, people’s actual decision-making processes are typically quite different from this ideal. For instance, one common behavioral tendency is to stick with the status quo when making an active choice would require a substantial investment of cognitive energy and attention. In the context of student loans, this could mean that students borrow the full amount they are offered in a financial aid package even if they need less than this amount to enroll. Alternatively, at institutions that do not automatically offer students loans as part of their financial aid packages, students who might benefit from borrowing may not apply for a loan.

Over the past several years, researchers have implemented a variety of interventions to help students make active and informed decisions at other similarly complex stages on the road to and through college, such as where to apply to college, whether to complete the federal financial aid application, and how to navigate a complex array of financial and procedural pre-matriculation requirements during the months after high school graduation. These interventions, which apply insights from behavioral sciences, have cost relatively little per student but have generated substantial improvements in college enrollment and persistence.

In these cases, the direction of how to nudge students is fairly clear. Encouraging low-income students to complete the Free Application for Federal Student Aid (FAFSA) qualifies them for thousands of dollars in need-based grant aid, making college more affordable if they choose to matriculate. Supporting high school graduates to complete required tasks at the college where they have been accepted and decided to enroll helps them follow through on their own intentions.

By contrast, providing loan guidance is inherently student-dependent. For a hard-working, motivated student planning to pursue engineering at a high-quality institution, encouraging them to consider a loan to meet the cost of attendance seems sensible. On the other hand, cautioning a student who is pursuing a less career-oriented field at a lower-quality institution to limit their borrowing might make sense.

The United States Department of Education (USDOE) has attempted to address the personalized nature of student borrowing decisions by requiring all students to complete loan entrance counseling before they receive a federal loan. However, as Ron Lieber reported in a recent New York Times article, the loan counseling itself is often beset with complex, seemingly irrelevant information that likely only further impedes active and informed decision-making by students.

How, then, can we intervene to help students make informed borrowing choices?

  1. Avoid defaults; prompt active choice. As I describe above, various defaults are built into the loan origination process: some institutions automatically include loans in their aid packages; other institutions do not include loans by default. Some institutions automatically offer students the full loan amount for which they are eligible. In each case, these default policies can lead students to borrow more or less than they would if prompted to make an active decision. Instead of employing these loan packaging strategies, colleges could actively encourage students to assess whether they need a federal loan to meet the cost of attendance or to pursue their intended program of study, and if so, how much they need to borrow to do so.
  2. Proactively deliver simplified information about the loan borrowing process. For many students, there is a several month gap between when they complete the FAFSA and when they finalize their borrowing decision. The Department of Education could leverage the contact information students provide on the FAFSA to send students loan-related planning prompts during this interim. Messages could emphasize, for instance, that students get to choose how much they borrow—they do not have to simply accept the amount offered by their institution. Other prompts could inform students that monthly payments as a portion of take-home income will vary considerably depending on their major and the institution they attend; these prompts could encourage students to choose a loan amount that will have manageable monthly payments given their planned course of study. High schools, colleges, and community-based organizations could employ similar outreach strategies with their students.
  3. Reduce barriers to professional, individualized loan counseling. The student loan origination process is sufficiently complex that, for many students, the types of low-touch nudges I’ve just highlighted may not go far enough to help students make an informed borrowing decision. Well-trained, impartial financial aid advisors or loan counselors can help students determine borrowing amounts that are well-aligned with their personal circumstances and goals. This loan counseling need not be in person, and can be delivered at a large scale. Researchers and practitioners are using a variety of interactive technologies to provide high-quality advising to students at various stages in the college pipeline; these strategies could easily be adapted to expand the number of students who have access to professional assistance when navigating complex student loan decisions.

Intervening early on to help students make informed borrowing decisions should be an important component of broader policy efforts to reduce the volume of people who experience repayment struggles or unmanageable debt burdens.