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The Effect of Student Loan Debt on Spending: The Role of Repayment Format

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Abstract

Across three studies, the authors investigate the effect of student loan debt on spending. Evidence from consumer finance data and experimental scenarios reveals that borrowers with moderate student loan debt are less likely to spend than people with low (or no) debt. However, borrowers with high debt are more likely to spend relative to those with moderate debt. The latter effect is consistent with goal disengagement, as paying off high student loan debt seems difficult. Importantly, the spending propensity associated with high student loan debt is attenuated by presenting the debt in a monthly payment (vs. lump-sum) format, which reduces perceived payoff difficulty. From a public policy perspective, the authors recommend that estimated monthly payments be included in all student loan disclosures.

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... Similarly, borrowers with lower levels of debt (under $15,000) are more likely to be behind in their payments (21%) compared to those with debt of $15,000 or higher (14%) (Board of Governors, 2020). However, Zhang, Wilcox, & Cheema (2019) found that households with low and high student debt levels were significantly more likely to spend beyond their incomes than those with moderate debt levels. These inconsistent findings reflect Hillman's (2014) observation that the relationship between debt amounts and default risk is non-linear. ...
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Total student loan debt rose to over $800 billion in June 2010, overtaking total credit card debt outstanding for the first time. By the time this article sees print, the continually updated Student Loan Debt Clock will show an accumulated total of roughly $1 trillion. Borrowing to finance educational expenditures has been increasing--more than quadrupling in real dollars since the early 1990s. The sheer magnitude of these figures has led to increased public commentary on the level of student borrowing. We move the discussion of student loans away from anecdote by establishing a framework for considering the use of student loans in the optimal financing of collegiate investments. From a financial perspective, enrolling in college is equivalent to signing up for a lottery with large expected gains--indeed, the figures presented here suggest that college is, on average, a better investment today than it was a generation ago--but it is also a lottery with significant probabilities of both larger positive, and smaller or even negative, returns. We look to available--albeit limited--evidence to assess which types of students are likely to be borrowing too much or too little.
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To increase transaction compliance, marketers sometimes temporally reframe the cost of a product from an aggregate one-time expense to a series of small ongoing expenses, often in spite of the fact that the physical payments remain aggregated. This temporal reframing is identified in this article as the "pennies-a-day" (PAD) strategy. A two-step consumer decision-making process of (1) comparison retrieval and (2) transaction evaluation is posited to explain effectiveness of this strategy. In a series of laboratory studies, general support for PAD effectiveness across a range of product categories and specific support for the proposed two-step model was found. The PAD framing of a target transaction is shown to systematically foster the retrieval and consideration of small ongoing expenses as the standard of comparison, whereas an aggregate framing of that same transaction is shown to foster the retrieval and consideration of large infrequent expenses. This difference in retrieval is shown to significantly influence subsequent transaction evaluation and compliance. Copyright 1998 by the University of Chicago.
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The authors propose that experiments that utilize mediational analyses as suggested by R. M. Baron and D. A. Kenny (1986) are overused and sometimes improperly held up as necessary for a good social psychological paper. The authors argue that when it is easy to manipulate and measure a proposed psychological process that a series of experiments that demonstrates the proposed causal chain is superior. They further argue that when it is easy to manipulate a proposed psychological process but difficult to measure it that designs that examine underlying process by utilizing moderation can be effective. It is only when measurement of a proposed psychological process is easy and manipulation of it is difficult that designs that rely on mediational analyses should be preferred, and even in these situations careful consideration should be given to the limiting factors of such designs.
How This College Is Trying to Get Students to Borrow Less
  • Jillian Berman
Berman, Jillian (2015), "How This College Is Trying to Get Students to Borrow Less," Market Watch (July 23), https://www.market watch.com/story/how-this-college-is-trying-to-get-students-to-bor row-less-2015-07-23.
Young Student Loan Borrowers Retreat from Housing and Auto Markets,” blog
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  • Sydnee Caldwell
At the N.Y. Fed: Press Briefing on Household Borrowing with Close-Up on Student Debt
  • Rajashri Chakrabarti
  • Andrew Haughwout
  • Donghoon Lee
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  • Wilbert Van Der Klaauw
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Student Debt Payback Far Worse Than Believed
  • Andrea Fuller
Fuller, Andrea (2017), "Student Debt Payback Far Worse Than Believed," The Wall Street Journal (January 18), https://www. wsj.com/articles/student-debt-payback-far-worse-than-believed-1484777880.
Liquidity and Insurance in Student Loan Contracts: Estimating the Effects of Income-Driven Repayment on Default and Consumption
  • Daniel Herbst
Herbst, Daniel (2018), "Liquidity and Insurance in Student Loan Contracts: Estimating the Effects of Income-Driven Repayment on Default and Consumption," working paper, University of Arizona, https://drive.google.com/file/d/1A-gq_LIqffY6r2gDTcUK9-Y3 ZV8Go6SU/view.
Financial Literacy Education: Simple Solutions to Mitigate a Major Crisis
  • Kyle Schickel
Schickel, Kyle (2016), "Financial Literacy Education: Simple Solutions to Mitigate a Major Crisis," Journal of Law & Education, 45 (2), 259-68.
The 'What the Hell' Effect: Some Effects of Goal Proximity and Goal Framing on Performance
  • Winona Cochran
  • Abraham Tesser
Cochran, Winona and Abraham Tesser (1996), "The 'What the Hell' Effect: Some Effects of Goal Proximity and Goal Framing on Performance," in Striving and Feeling: Interactions Among Goals, Affect, and Self-Regulation, L. L. Martin and A. Tesser, eds. Mahwah, NJ: Lawrence Erlbaum Associates, 99-120.
College Debt Far from a Uniform Burden
  • Melissa Korn
Korn, Melissa (2017a), "College Debt Far from a Uniform Burden," The Wall Street Journal (September 20), https://www.wsj.com/arti cles/college-debt-far-from-a-uniform-burden-1505880001.