CeDEx
Centre for Decision Research and Experimental Economics

Ben Marx (University of Illinois at Urbana-Champaign)

Date(s)
Monday 7th December 2015 (11:00-12:00)
Description
This week's seminar will be given by Ben Marx from the University of Illinois at Urbana-Champaign.  

Please note the unusual time and venue for this workshop

Title: Default Bias in Borrowing: Evidence from a Field Experiment on Federal Student Loans 

Nearly half of all post-secondary students in the U.S. attend two-year public institutions (community colleges). All students enrolled in participating higher education institutions are eligible for federal loans, and the majority of community college students are also eligible for subsidized loans that do not accrue interest while the borrower is in school. While eligibility for subsidized loans is determined at the federal level, colleges are allowed to offer students different loan amounts, including $0. Approximately half of all community colleges default students into the maximum subsidized loan (with unsubsidized loans added in some cases) while the remainder provide their students with $0 loan offers. In previous work, we show that a $0 loan default offer creates a fixed cost of borrowing, which leads to substantially lower loan take-up and potentially reduces educational attainment.

For this study, we conduct a field experiment on student loan default options at a large community college. We randomly assign students within the college to a default loan amount of either zero or a positive amount that includes the student’s maximum subsidized loan. Using the actual loan amounts chosen by these students, we identify and examine default bias. We compare the distributions of loan amounts under the two information regimes and quantify the excess share of students who will accept the default loan amount. Defaulting students into the loan program increases the share of borrowers by over 30 percent. We examine heterogeneity by student resources, dependency status, year of school, and past experience of borrowing or attending the same school. We find evidence of strong default bias across all types of students.

Centre for Decision Research and Experimental Economics

Sir Clive Granger Building
University of Nottingham
University Park
Nottingham, NG7 2RD

telephone: +44 (0)115 951 5458
Enquiries: jose.guinotsaporta@nottingham.ac.uk
Experiments: cedex@nottingham.ac.uk