How information is presented can have an outsize impact on your actions. Behavioral scientists at the University of Pennsylvania’s Wharton School recently tested a similar theory. They wondered if the right messaging — in the form of a “nudge,” or reminder — could help struggling student loan borrowers.
“There have been large studies that have shown nudges can work in vaccinations or helping to reduce failure to appear in court,” says Robert Kuan, a third-year PhD student at Wharton who co-authored a January study in partnership with the Biden Administration’s Education Department. “But we didn’t really know if it would work for student loan repayment.”
It did.
Performed in the fall of 2023 (after the COVID-19-caused pause on monthly payments), the study sent various types of emails to federal loan borrowers about their repayment options. Those nudges reduced credit-harming delinquencies by 0.42 percent.
That might not seem like a lot, but if the research team had scaled the best-performing nudge to all of the nearly 13 million federal loan borrowers included in the study, they could have helped about 80,000 borrowers nationwide avoid delinquency.
Why this matters now: Student loan delinquencies are on the rise
The Department of Education resumed debt collection on May 5 for five million federal student loan borrowers who are in default (or more than 360 days delinquent). By their own accounting, the number could grow to 10 million by the summer.
Put another way: The $1.6 trillion student loan crisis, which has no apparent end in sight, is looking more and more bleak by the day, particularly for those far behind in repayment.
But the Wharton study — “Behavioral Nudges Prevent Loan Delinquencies at Scale” — may be a glimmer of light. It shows how an Education Department that’s well-intentioned and well-equipped to help borrowers along in repayment could make a small but significant dent in the country’s overwhelming education debt.
After all, nudges appear to work even for borrowers who might be most desperate to put their debt in a drawer, close it shut and not think about it.
Money and mental health
According to Bankrate’s Money and Mental Health Survey, 43 percent of U.S. adults say money negatively impacts their mental health, at least occasionally, causing feelings of anxiety, stress, worrisome thoughts, loss of sleep, depression and other effects.
“This is what makes this experiment pretty surprising because we’re sending emails to people who have missed a loan payment,” says Kuan. “So, this is a difficult-to-move population.”
And yet, the study showed a positive effect of emailed nudges: reduced delinquency and a higher rate of applying for income-driven repayment (IDR) plans that cap a borrower’s monthly dues at a percentage of their discretionary income. (Though a Wharton school professor, Sylvain Catherine, co-authored separate research on whether IDR plans benefit borrowers in the long run.)
The study’s borrowers
- They held an average of $34,655 in outstanding loans and owed an average of $340 per month.
- 63% had missed a payment by 60 days or more in the past.
- 21% had defaulted on a loan.
- 39% had graduated from college.
How the study worked
- Some borrowers received the Education Department’s standard message after missing a payment.
- Other borrowers received a behavioral science-designed message encouraging them to apply for an IDR plan — while highlighting their potential savings — and/or to enroll in automatic payments.
- Some borrowers in the latter group also received a follow-up message (or second nudge).
Kuan recognizes that we are in a different position than when the study was performed. Many of the Education Department officials he and his colleagues collaborated with are no longer employed there.
Plus, borrowers might have been paying more attention to a Biden Administration hell-bent on targeted loan forgiveness and generous repayment options, like the since-scuttled SAVE repayment plan.
“But it still is very promising that by sending people emails, they didn’t just ignore them,” says Kuan. “And we actually got people to take action and put themselves in a better financial position because of that.”
In other cases, perhaps where borrowers aren’t in or on the verge of delinquency or default, a helpful reminder to be actively engaged in repayment can’t hurt. Worst-case scenario: It winds up in the borrower’s spam folder. Best case: They save time, money and stress.
There’s a lot of research that shows that people forget to take actions, so reminders are actually really powerful.
— Robert Kuan, PhD student at the University of Pennsylvania’s Wharton School
For example, the Wharton study found that, just by sending a follow-up email, rates of applying to IDR plans rose by 10 percent, says Kuan.
“Not to say that nudges by themselves will change the world, because there’s still, with student loans, structural solutions that we can think through, like loan forgiveness and making student loan debt easier to discharge under hardship circumstances,” says Kuan. “Nudges aren’t a replacement for those. But to the extent that we might be politically divided and structural solutions aren’t viable, then nudges are a great complement. They’re cost-effective, they leverage psychological insights, and they can be implemented at scale.”
Kuan’s “surprising” study results
- Percentages beat dollars. Borrowers who received messages of their potential IDR-related savings in percentage form were more likely to take action than peers who received messages about equal-sized savings presented in dollars and cents.
- Simpler isn’t always better. Borrowers who received messages recommending two actions (say, applying for IDR and enrolling in autopay) were more likely to act than borrowers who received a simpler, one-action recommendation.
What to do if you need help repaying student loans
Kuan received Pell Grant funds and borrowed student loans for his undergraduate degree. He credited his first post-college job with helping to aggressively repay education debt.
So, he has a “personal” tie to America’s education debt problem, even if he can’t directly relate to the most distressed borrowers.
“In our dataset of 13 million borrowers, there are some people with hundreds of thousands of dollars in student loans,” says Kuan. “And I can only imagine how a person thinks about paying something that they think they can never [fully] repay. So, that is something that I think must be so demoralizing for an individual.”
The Wharton study is a low-cost solution for the Education Department to help some of these borrowers. But, as Kuan acknowledged, it’s not a universal problem-solver.
If you’re feeling demoralized, consider that, as bleak as it may seem, there’s always a best next choice for your repayment. You might investigate options like those highlighted in the study:
- IDR can be a way to temporarily or permanently lower your monthly dues to fit within your budget.
- Autopay is a simple hack for avoiding late payments (and earning an interest-rate reduction in some cases).
Other repayment strategies to consider include:
- Federal loan forgiveness: There are various ways to discharge student loan debt, including Public Service Loan Forgiveness for government and nonprofit workers at eligible employers.
- Loan repayment assistance: For federal or private loans, seek out aid programs from states, private organizations and even companies that pay off student loans.
- Repayment pauses: Postponing your payments temporarily via deferment or forbearance for federal loans and via some private lenders can be useful if you need time to rebuild your income or fix your budget — but interest usually accrues during such pauses.
- Make extra payments: This can cut down the accrual and compounding of student loan interest. One popular method is repaying your student loans biweekly.
- Student loan refinancing: Creditworthy applicants can seek a lower interest rate by refinancing with a private lender — at the risk of permanently forfeiting federal loan protections.
If you’re in dire need of help, don’t hesitate to ask. You might consider contacting your federal loan servicer, the Education Department’s Default Resolution group or working with a certified student loan counselor or lawyer.
Consider this a nudge.
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