Association for Public Policy Analysis & Management

College student loan borrowing in the United States holds tremendous promise, but also poses significant threats. Student loans can promote access to college and therefore increase expected earnings, social mobility, and economic productivity. However, educational debt can diminish the returns students get from education, make going to college less attractive, saddle students and the economy, and disproportionately burden low-income students. In response to increasing student loan borrowing and default, policymakers are scrambling to design solutions that provide repayment relief to student borrowers and encourage students to make sensible borrowing decisions. Nevertheless, we still know very little about how college students make judgments related to student loans. The goal of this study is to help us better understand whether students are making informed decisions when they decide to borrow, so that we can use those findings to help design policies that will enable students to maximize the benefits associated with college.

Do students understand the future implications of their borrowing decisions? There are reasons to believe that they do not. In this study, I examine whether information deficiencies and computational errors factor into college students’ borrowing decisions and if so, how they affect financial and educational choices. The primary methodology is a randomized field experiment conducted in partnership with a financial aid office. The setting is a large public university and the sample includes all non-graduating students who obtained student loans in the prior academic year (~10,000 students). I randomly assign half to receive individually-tailored letters with information that students may not have had earlier access to or well-understood; the other half will be a control group. I then compare the two groups’ choices in the following year, with outcomes including the amount of student loan debt incurred, educational major, and requests for more information. This study contributes to the literature about how college students’ make loan decisions, and also evaluates a relatively simple, low-cost intervention that could support sound borrowing decisions among students.