Working Paper

The Effect of Student Loan Payment Burdens on Borrower Outcomes

Abstract: Rising student loan debt and concerns over unaffordable payments provide a rationale for the broad class of “income-driven repayment” (IDR) plans for federal student loans. These plans aim to protect borrowers from delinquency, default, and resulting financial consequences by linking payments to income and providing forgiveness after a set repayment period. We estimate the causal effect of IDR payment burdens on loan repayment and schooling outcomes for several cohorts of first-time IDR applicants using a regression discontinuity design. Federal student loan borrowers who are not required to make payments see short-run reductions in delinquency and default risk, but these effects fade or reverse in the longer run as some borrowers become disconnected from the student loan repayment system when not required to make payments.

Keywords: student debt; inattention; income-driven repayment;

JEL Classification: I22; G51; G41;

https://doi.org/10.21799/frbp.wp.2024.08

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2024-03-21

Number: 24-08