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Does warning students about loan debt lead to less borrowing?
Experiments in Indiana and Montana show that students borrow less when they know more. - photo by Eric Schulzke
Could student debt be curtailed by just sending a letter telling students how much they have borrowed and how long it will take to pay off?

While it's too early to say for sure, a program that began at Indiana University may have done just that. The program began in 2012, and since that time, the IU reports an 18 percent reduction in student debt loads, according to a report from the Pew Charitable Trusts.

This isn't the first time similar results have been found. In 2015, research published by the Federal Reserve Board looked at a natural experiment in Montana, where students at Montana State University had received a similar letter and an offer career counseling, while students at the University of Montana received neither.

That study found that those who got the letter and the offer borrowed $1,360 less the subsequent semester, or about 1/3 less, without any negative impact on their academic performance.

In fact, those who got the letter and the offer improved their GPAs and credits earned the next semester and were more likely to switch to a STEM major. The impact on all fronts was higher for women than for men.

While the jury remains out on the science behind these experiments, Indiana has not mandated that all state universities and colleges mimic the program, and the legislator who authored the bill, Casey Cox, a Republican, told Pew that he is frequently fielding calls from states looking to copy the program.

The role of information in shaping debt behavior has long intrigued policy makers and researchers, and with student debt levels at all time highs, it was inevitable that the concept would be applied to college debt.

A 2014 Brookings report, for example, showed that many students who have debt greatly underestimate how much they have, and one study found that 28 percent of first-year college students who had federal student debt did not think they had any at all.

But the Brookings report also highlights a possible paradox: knowing more might actually lead to better debt choices, which in some cases might mean more debt. The theory is that the current muddiness surrounding debt may actually lead some young people to fear and avoid debt more than they would if they had a clearer picture.

In short, the authors argue that confusion of student debt "perpetuates a narrative" about crushing student debt loads, even though most student debt is still manageable and a good investment. So, the report suggests, providing more accurate information to students about their debt and repayment options may help clear the air, resulting in better decisions and less fear.

In some cases, that may mean accepting reasonable debt. Or, as the Montana case suggests, it may influence students to shift their majors to fields where the debt has a more likely payoff.
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