Student Loan Nudges: Experimental Evidence on Borrowing and Educational Attainment

Abstract

We estimate the impact of student loan “nudges” on community college students' borrowing and provide the first experimental evidence of the effect of student loans on educational attainment. Nonbinding loan offers listed in students' financial aid award letters, that do not alter students' choice sets, significantly affect borrowing. Students randomly assigned to receive a nonzero loan offer were 40 percent more likely to borrow than those who received a $0 loan offer. Nudge-induced borrowing increased both GPA and credits earned by roughly 30 percent in the year of the intervention, and in the following year, increased transfers to four-year colleges by 10 percentage points (nearly 200 percent). We predict that the average student would be better off receiving a nonzero loan offer for any discount rate below 12.4 percent. Students' borrowing responses to the nudge are most consistent with a model in which nonzero offers provide information about loan eligibility, suggesting that for most students, nonzero offers are welfare enhancing. Given that over 5 million U.S. college students receive $0 loan offers, our results indicate the potential to achieve large gains in educational attainment through changes to the choice architecture around borrowing.