Association for Public Policy Analysis & Management

More students than ever borrow to finance their post-secondary education, with average balances rising over time. However, it is not clear whether students currently have transparent, relevant, and low-cost information when making their decisions. This paper uses a natural experiment to causally determine how targeted provision of timely, salient, and actionable information about student loan debt can change college students' loan choices, majors, credits, and academic performance. We analyze a unique intervention, where students were targeted if their debt levels--given by a specific debt and year formula based on their standing in school--suggested that they might have difficulty repaying their student debt with their prospective income. Montana State University university sent these students warning letters informing them of their debt levels, giving academic and financial advice, and inviting them to incentivized one-on-one financial counseling.

We rely on a unique administrative dataset containing detailed information on students' academic backgrounds, financial aid, and academic outcomes to analyze the effect of this intervention. We utilize a difference-in-difference-in-differences strategy to exploit three comparisons. First, we compare students who received the letters at Montana State University to those that also had loans but were below the cutoff for receiving a letter. Second, we compare students who received the letters at Montana State University to those that would have received the letters at the University of Montana had the same policy been in place on that campus. Third, we compare students who received the letters to those who would have received them in the years before the policy was implemented.

We find that students who receive the targeted letters reduce borrowing in the subsequent semester by $1,360, or about a third.  For freshmen, the intervention increases retention rates for the subsequent semester and year. In addition, receiving a warning letter increases credits attained that semester, suggesting that students complete courses from which they may have otherwise withdrawn. These results suggest that early interventions that draw borrowers' attention to their relatively high student loan debt balances and that offer information and financial counseling on managing their debt, can change financial decisions and improve academic outcomes.