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Yahoo
23-05-2025
- Business
- Yahoo
We're facing a student loan default crisis. This academic research might help
How information is presented can have an outsize impact on your actions. Behavioral scientists at the University of Pennsylvania's Wharton School recently tested a similar theory. They wondered if the right messaging — in the form of a 'nudge,' or reminder — could help struggling student loan borrowers. 'There have been large studies that have shown nudges can work in vaccinations or helping to reduce failure to appear in court,' says Robert Kuan, a third-year PhD student at Wharton who co-authored a January study in partnership with the Biden Administration's Education Department. 'But we didn't really know if it would work for student loan repayment.' It did. Performed in the fall of 2023 (after the COVID-19-caused pause on monthly payments), the study sent various types of emails to federal loan borrowers about their repayment options. Those nudges reduced credit-harming delinquencies by 0.42 percent. That might not seem like a lot, but if the research team had scaled the best-performing nudge to all of the nearly 13 million federal loan borrowers included in the study, they could have helped about 80,000 borrowers nationwide avoid delinquency. The Department of Education resumed debt collection on May 5 for five million federal student loan borrowers who are in default (or more than 360 days delinquent). By their own accounting, the number could grow to 10 million by the summer. Put another way: The $1.6 trillion student loan crisis, which has no apparent end in sight, is looking more and more bleak by the day, particularly for those far behind in repayment. But the Wharton study — 'Behavioral Nudges Prevent Loan Delinquencies at Scale' — may be a glimmer of light. It shows how an Education Department that's well-intentioned and well-equipped to help borrowers along in repayment could make a small but significant dent in the country's overwhelming education debt. After all, nudges appear to work even for borrowers who might be most desperate to put their debt in a drawer, close it shut and not think about it. Money and mental health According to Bankrate's Money and Mental Health Survey, 43 percent of U.S. adults say money negatively impacts their mental health, at least occasionally, causing feelings of anxiety, stress, worrisome thoughts, loss of sleep, depression and other effects. 'This is what makes this experiment pretty surprising because we're sending emails to people who have missed a loan payment,' says Kuan. 'So, this is a difficult-to-move population.' And yet, the study showed a positive effect of emailed nudges: reduced delinquency and a higher rate of applying for income-driven repayment (IDR) plans that cap a borrower's monthly dues at a percentage of their discretionary income. (Though a Wharton school professor, Sylvain Catherine, co-authored separate research on whether IDR plans benefit borrowers in the long run.) They held an average of $34,655 in outstanding loans and owed an average of $340 per month. 63% had missed a payment by 60 days or more in the past. 21% had defaulted on a loan. 39% had graduated from college. Some borrowers received the Education Department's standard message after missing a payment. Other borrowers received a behavioral science-designed message encouraging them to apply for an IDR plan — while highlighting their potential savings — and/or to enroll in automatic payments. Some borrowers in the latter group also received a follow-up message (or second nudge). Kuan recognizes that we are in a different position than when the study was performed. Many of the Education Department officials he and his colleagues collaborated with are no longer employed there. Related reading: Biden Administration's top higher ed official: Dismantling the Education Department won't fix how Americans pay for college Plus, borrowers might have been paying more attention to a Biden Administration hell-bent on targeted loan forgiveness and generous repayment options, like the since-scuttled SAVE repayment plan. 'But it still is very promising that by sending people emails, they didn't just ignore them,' says Kuan. 'And we actually got people to take action and put themselves in a better financial position because of that.' In other cases, perhaps where borrowers aren't in or on the verge of delinquency or default, a helpful reminder to be actively engaged in repayment can't hurt. Worst-case scenario: It winds up in the borrower's spam folder. Best case: They save time, money and stress. For example, the Wharton study found that, just by sending a follow-up email, rates of applying to IDR plans rose by 10 percent, says Kuan. 'Not to say that nudges by themselves will change the world, because there's still, with student loans, structural solutions that we can think through, like loan forgiveness and making student loan debt easier to discharge under hardship circumstances,' says Kuan. 'Nudges aren't a replacement for those. But to the extent that we might be politically divided and structural solutions aren't viable, then nudges are a great complement. They're cost-effective, they leverage psychological insights, and they can be implemented at scale.' Kuan's "surprising" study results Percentages beat dollars. Borrowers who received messages of their potential IDR-related savings in percentage form were more likely to take action than peers who received messages about equal-sized savings presented in dollars and cents. Simpler isn't always better. Borrowers who received messages recommending two actions (say, applying for IDR and enrolling in autopay) were more likely to act than borrowers who received a simpler, one-action recommendation. Kuan received Pell Grant funds and borrowed student loans for his undergraduate degree. He credited his first post-college job with helping to aggressively repay education debt. So, he has a 'personal' tie to America's education debt problem, even if he can't directly relate to the most distressed borrowers. 'In our dataset of 13 million borrowers, there are some people with hundreds of thousands of dollars in student loans,' says Kuan. 'And I can only imagine how a person thinks about paying something that they think they can never [fully] repay. So, that is something that I think must be so demoralizing for an individual.' The Wharton study is a low-cost solution for the Education Department to help some of these borrowers. But, as Kuan acknowledged, it's not a universal problem-solver. If you're feeling demoralized, consider that, as bleak as it may seem, there's always a best next choice for your repayment. You might investigate options like those highlighted in the study: IDR can be a way to temporarily or permanently lower your monthly dues to fit within your budget. Autopay is a simple hack for avoiding late payments (and earning an interest-rate reduction in some cases). Other repayment strategies to consider include: Federal loan forgiveness: There are various ways to discharge student loan debt, including Public Service Loan Forgiveness for government and nonprofit workers at eligible employers. Loan repayment assistance: For federal or private loans, seek out aid programs from states, private organizations and even companies that pay off student loans. Repayment pauses: Postponing your payments temporarily via deferment or forbearance for federal loans and via some private lenders can be useful if you need time to rebuild your income or fix your budget — but interest usually accrues during such pauses. Make extra payments: This can cut down the accrual and compounding of student loan interest. One popular method is repaying your student loans biweekly. Student loan refinancing: Creditworthy applicants can seek a lower interest rate by refinancing with a private lender — at the risk of permanently forfeiting federal loan protections. If you're in dire need of help, don't hesitate to ask. You might consider contacting your federal loan servicer, the Education Department's Default Resolution group or working with a certified student loan counselor or lawyer. Consider this a nudge. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Chicago Tribune
27-02-2025
- Business
- Chicago Tribune
Marisa Novara: When it comes to affordable housing in Chicago, there is no one size fits all
There's been a lot of ink spilled recently on the high cost of delivering affordable housing. At a time when the Institute for Housing Studies at DePaul University estimates that 120,000 more Chicago households need affordable housing than what currently exists and the number of people experiencing homelessness in 2024 was threefold higher than the previous year, it's a worthy debate. In my view, we should all be able to agree on three things. The first: Where we can keep costs and inefficiencies down, we should. It's up to all of us — public and private funders, developers and contractors — to stay vigilant about ways to keep costs down. Some reasons for rising costs such as high interest rates and a COVID-19-caused jump in the price of materials are out of local actors' control. Other reasons such as local government regulations — including those I imposed when I was housing commissioner — should be up for discussion. Regulations have costs, and we should be open to ongoing, vigorous debate about their tradeoffs. One surefire way to reduce costs is to provide speed and certainty when it comes to permitting and the public approval process. We should all get behind the city's Cut the Tape initiative to streamline and expedite development processes and minimize one-off rejections by the City Council of developments that follow the city's stated principles. An example is the 2022 Connected Communities Ordinance that reinforced a citywide embrace of dense housing with reduced parking by transit. When developers offer up exactly what they were told the city wanted, let's reduce their time and uncertainty tax — and resulting costs — by getting them on the road to construction as soon as possible. The second: We should all agree that different models have different costs. It does not help any of us involved in or committed to the hard work of developing affordable housing to compare apples to oranges. Federally regulated Low-Income Housing Tax Credits, for instance, are built with a slew of mandated costs that do not apply to the construction of single-family homes. Similarly, 300-unit market-rate buildings have lower costs per unit than 40-unit buildings that absorb the cost of federal funds and the inefficient system that is LIHTC. All are important forms of housing, and their costs are simply not comparable. The third: When it comes to affordable housing, there is no one size fits all. Not all developments are trying to reach the same goals. Some developments that are pushing the envelope to reduce energy bills to their low-income tenants will cost more on the front end. We know that the savings are borne out over time by both tenants who pay less in utilities and by reduced damage to the environment. In other cases, the choice is made to instead focus on keeping the upfront costs down and buyers or tenants pay higher utility costs over time. Neither is wrong; they just have different goals. If land or a building in a high-cost area must be purchased in order to build affordable housing, it will cost more on the front end than to do so in an area with lower property values. But as I've argued before, affordable housing belongs everywhere, not only where it's cheapest to build. Why? Lots of reasons, but I'll share one moral and one economic: My fundamental belief is that people should have as many choices as possible about where they can live. Period. It's what sociologist Monica Bell calls 'residential freedom.' If you think building affordable housing only where land values are low is cheaper in the long run, I've got some data for you. Chicago forgoes $8 billion in regional gross domestic product because of our high racial and economic segregation. If we were less segregated, we could benefit from $4.4 billion in additional income each year, a 30% lower homicide rate and 83,000 more bachelor's degrees, according to a 2017 study from the Metropolitan Planning Council. In the long run and in isolation, in other words, none of our options are cheap. We live in a country in which only 1 in 4 people who qualify for affordable housing actually receive it. In Chicago, those numbers play out against a backdrop of profound racial and economic segregation. In the face of that reality, let's acknowledge that a broad tent of approaches that meet a range of goals is needed, from high-rises with 20% affordable units to backyard coach houses to publicly funded all-affordable apartments to unsubsidized rental rehabs to new construction for-sale single-family homes. We need every creative solution in all neighborhoods for all Chicagoans. Because when our neighbors do better, we all do better. Marisa Novara was commissioner of the Chicago Department of Housing from 2019 to 2023. She now serves as vice president of community impact at The Chicago Community Trust.
