The Effect of Student Loan Payment Burdens and Nonfinancial Frictions on Borrower Outcomes

Abstract Rising student loan debt and concerns over unaffordable payments provide rationale for “income-driven repayment” (IDR) plans, which aim to protect borrowers from default and resulting financial consequences by linking payments to income. We estimate the causal effect of IDR payment burdens on loan repayment and attainment for several cohorts of first-time IDR applicants using a regression discontinuity design. Borrowers who are not required to make payments experience short-run reductions in delinquency and default risk, primarily because of lower costs of inattention, but this effect fades over the longer run as some borrowers become disconnected from the student loan repayment system.