How a Simple Tweak to a Federal Form Could Help Borrowers Potentially Avoid Defaulting on Student Loans

A federal program seeks to help borrowers avoid defaulting on their student loans through income-based repayment plans, but many eligible borrowers do not enroll. A new study argues that an electronic pre-filled application process significantly increases the take-up rate.




Average student borrowing is growing at a rate exceeding inflation, and many college graduates are struggling to make their monthly payments. Concerns over delinquency and default are growing, and in 2018 student loan delinquency rates are higher than those of any other type of household debt. The 2018 student loan update from the Federal Reserve Bank of New York Consumer Credit Panel indicates that 4.8 million borrowers defaulted on their student loans in 2017 and 2.1 million were more than 90 days delinquent. In billions of dollars, this translates to $124.4 billion in default and $64.3 billion in delinquent balances.


Given repayment problems for many borrowers, income-based repayment plans can help many borrowers avoid default. These income-driven repayment plans link a borrower’s actual earnings to monthly payments, which insures against adverse labor market shocks. However, despite the availability of income-driven repayment options, many borrowers do not enroll in these plans and continue to default on their student loans.


Income-driven repayment options trade off insurance benefits to borrowers with direct costs to taxpayers who ultimately bear the costs of loan non-repayment. These repayment plans represent attractive options for many students in financial distress. As such, should a borrower experience job loss or an unexpectedly low level of earnings, repayment burden will not be translated to crippling monthly payments but into small, or even zero, amounts.


Recognizing that student borrowers had difficulties repaying their loans early in their careers, the 2007 reauthorization of the Higher Education Act created the Income-Based Repayment plan. The Income-Contingent Repayment plan preceded the first Income-Based Repayment plan. This has been available since 1994, but there was a relatively low participation rate. This plan has become obsolete for new loans. The IBR program first capped borrowers’ monthly payments at 15 percent of their income following a large exemption and committed to forgiving their loan balances after 25 years of repayment. Congress increased the generosity of the program by offering a new plan that would cap payments at 10 percent of discretionary income coupled with a forgiveness term of 20 years, through the Pay As You Earn (PAYE) plan, which became available in 2012.


Despite clear benefits for borrowers, the take-up of these plans has remained low. The Treasury Department estimated in 2015 that only about 20 percent of borrowers who are eligible for income-driven repayment are enrolled in the program. Many borrowers also appear to be making dominated choices. Many borrowers who default on their student loans could have lowered their payments by enrolling in income-driven repayment plans. Given that borrowers who default see a similar fraction of their wages garnished in addition to credit market consequences, in most cases enrolling in income-driven repayment should be strictly preferred to defaulting on a student loan. 


We study an experiment varying take-up terms. The experiment features a partnership with a large loan servicer, Navient, and tests whether the electronic filing of applications using Adobe E-sign increases participation in the program. Bureaucratic hurdles and overwhelming paperwork can become significant obstacles for past-due borrowers. The findings of the experiment provide policymakers with an easy, low-cost policy lever to streamline participation in income-driven repayment. Individuals in the treatment group were given the option of signing electronically an application that was already pre-populated with their earnings and family information, which almost tripled the application return rate.



The experiment we study was conducted between April and July 2017 and consisted of borrowers who had taken out Federal Family Education Loan (FFEL) Program loans. During the experiment, borrowers in the treatment group were given the option of Adobe E-sign. Agents contacted the borrower, gathered salary and family information over the phone, and used this to pre-populate the IDR application. The treatment group was offered, as a result, a pre-filled application form that could be signed electronically.


Given the random assignment to treatment, a simple comparison of pre- and pro- outcomes sheds light on the issue. In March, there are fairly similar levels of participation. However, by August, treatment was administered, and take-up rates significantly increased for the treatment. There is a large and immediate effect on the take-up rate of income-driven repayment after treatment. In numbers, these effects translate to 61 percent enrolling in income-driven repayment. This is in sharp contrast with the previous 24 percent of pre-qualified borrowers returning their 12-page applications. This reflects an application rate 2.5 times higher than the rate prior to treatment. 


Without changing any other parameter of income-driven repayment, the reduction of hassle costs through the use of electronic, pre-populated applications based on Adobe E-sign has led to a large effect on the take-up rate of the program. This finding reinforces the statements of surveyed pre-qualified borrowers who did not submit their applications: they cited the complexity and time-related costs of the application process as the main deterrents they experienced when deliberating on this decision. This experiment shows that when these impediments to enrollment are removed, take-up increases. There were also large reductions in monthly payments, and the intervention came close to eliminating delinquency among the treatment borrowers.


What are the implications of these findings for policymakers? The fundamental takeaway of this experiment should be that lowering hassle costs by offering an electronic pre-filled application process substantially increases the take-up rate of income-driven repayment plans. This provides policymakers with a low-cost way in which they can increase participation in the program, if this is a goal, and this effect potentially may apply in regards to many other public and private programs.


Holger M. Mueller is the Nomura Professor of Finance at New York University Leonard N. Stern School of Business. Constantine Yannelis is an assistant professor at the University of Chicago Booth School of Business. 


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