Panel Paper: Designing Effective Financial Tips to Guide Debt Repayment: Experimental Evidence from Lower-Income Tax Refund Recipients

Saturday, November 9, 2019
Plaza Building: Concourse Level, Plaza Ballroom E (Sheraton Denver Downtown)

*Names in bold indicate Presenter

Olga Kondratjeva, Stephen Roll, Sam Bufe, Michal Grinstein-Weiss and Yung Chun, Washington University in St. Louis

Background: For many low- and moderate-income (LMI) households, the tax refund is the household’s largest single check of the year, and the most common usage of the tax refund is to pay down existing debt (Grinstein-Weiss et al., 2015). How they choose to pay down that debt may impact the amount they pay in interest and fees and other indicators of financial health. Recent evidence indicates that traditional financial education has limited impacts on financial behaviors (Fernandes, Lynch, & Netemeyer, 2014). However, this research also finds that effective financial education is the one tailored to recipient needs and occurs at the point of important financial decisions (e.g., house purchasing). Building on this evidence and other recent work on the efficacy of providing rules of thumb around debt management (Theodos et al., 2016), we administered a randomized controlled trial that provided simple financial tips for LMI tax filers after they learned their tax refund or tax liability amount. The purpose of the experiment was to test whether providing simple financial tips can impact household debt behaviors and outcomes.

Data and Method: Longitudinal data for this research come from the Household Financial Survey administered to LMI tax filers in two waves in 2018—immediately after tax-filing and six months after tax-filing (N=3,903). Immediately following the process of tax-filing, LMI survey respondents were randomized into three groups: a control group received no financial tip, one treatment group randomly saw one of four brief financial tips on how to manage outstanding debt payments, and participants in another treatment group were asked to select a financial tip that was most relevant to their debt situations. One month after tax-filing, each treated individual received an email reminder about an assigned or selected financial tip. Six months after tax-filing, respondents in both control and treatment groups participated in the second wave of the survey, which asked about their debt behaviors, debt levels, and expectations about the ability to repay their debts. Both survey waves also contained detailed questions on demographic and financial characteristics of tax filers. We conduct the intent-to-treat regression analysis to test the effectiveness of delivering simple financial tips on self-reported debt-related outcomes.

Preliminary Results: We find that the delivery of financial tips reduced the amount of unsecured debt by 32.5 percent, particularly for individuals who received tax refund at tax time. Individuals who did not receive tax refund and got an opportunity to select a financial tip that best fit their debt circumstances were 4 percentage points more likely to follow any specified debt-related behavior. The delivery of financial tips did not produce a significant effect on more intensive outcomes—the total amount of debt or perceptions of debt problem in the future.

Significance: This paper contributes to the emerging research on the use of tips and rules of thumb as tools to impact financial behaviors. As financial education moves away from traditional classes and towards well-timed, low-touch interventions, it is important to understand what interventions are most effective.