Association for Public Policy Analysis & Management

Prior research has documented that a subset of potential and current college students are averse to borrowing for higher education (Cunningham & Santiago, 2008; Burdman, 2005; Caetano, Palacios, & Patrinos, 2011; Palameta & Voyer, 2010; Goldrick-Rab & Kelchen, 2013). Our own previous work demonstrates that more than 20 percent of high school seniors do not believe it is ok to borrow money for education and more than 40 percent avoid hypothetical financial aid packages that incorporate student loans (Boatman, Evans, & Soliz, 2015). As loans become an increasingly important method of financing postsecondary education, students who are unwilling to borrow may make poor human capital investment decisions because they are unwilling to utilize the policy mechanism (student loans) to resolve credit constraints.

A large portion of loan averse students might be unwilling to borrow because of the risk associated with the inability to repay the loan balance after leaving higher education. Forms of income based repayment dramatically reduce that risk by basing monthly payments on the borrower’s current income rather than the loan balance. Unfortunately, few students take advantage of this option when entering repayment. In 2014 only 20% of borrowers entering repayment enrolled in income-based plans (College Board, 2015).  The purpose of the study is to determine how information about loans and income based repayment may affect high school seniors’ attitudes about borrowing for higher education.

We employ a clustered randomized control trial in six diverse high schools in Jefferson County, Louisville, Kentucky to identify the effect of loan and repayment information on borrowing attitudes and perceptions. The information treatment is watching a 4-5 minute video in a classroom during the school day that explains the features and advantages of federal student loans and income based repayment. The control condition is watching a 4-5 minute video that explains how to read a financial aid award letter, which is theoretically neutral on student loans. The loan attitude outcomes are recorded via a ten minute paper survey with several measures of loan aversion and questions about financial aid and loan knowledge. Randomization was conducted at the classroom level within each high school such that an equal number of classrooms received the treatment and control conditions. Approximately 650 high school seniors participated in the experiment over the course of three days during January 2016. Data collection is complete.

Results of this study will suggest whether information on income based repayment can mitigate loan aversion. If the results are positive, it suggests providing information on income based repayment options at the time of the borrowing decision is vital to improving college access to low- and middle-income populations who are averse to borrowing due to the risk of being able to repay the loans.