Abstract
Evidence from behavioral economics suggests that the framing and labeling of choices affect financial decisions. Through a randomized control trial of over six thousand high school seniors, community college students, and adults without a college degree, we identify the existence of both framing and labeling effects in respondents’ preferences for borrowing for postsecondary education. How financially equivalent contracts are framed alters the preferences of high school and community college students. Furthermore, simply labeling a contract a “loan” reduces the likelihood of selecting that option by 8–11 percentage points among those samples. These effects are more pronounced among Black high school respondents and Hispanic high school and community college respondents who are both twice as likely as White respondents to avoid the loan option when it is labeled a “loan.” Finally, we provide suggestive evidence that this labeling effect is driven by more risk averse respondents. Our findings imply that the federal government, states, and institutions should be attentive to the language used when offering and explaining financial aid packages for higher education.
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Notes
The survey used two forms to reduce the time burden on completion, and the risk measure was only included on one form of the survey. Survey forms were randomly assigned to respondents.
Results are robust to the inclusion of all respondents and ignoring the covariates for which we have missing values.
The sample size is notably smaller for this analysis because only half of the respondents were asked to complete our risk aversion measure, and there are missing values due to a subset of respondents skipping this question.
However, there is already substantial variation in the terms used for labeling unsubsidized loans in institutional financial aid award letters. A recent report from New America and uAspire (2018) found 136 unique terms describing unsubsidized loans across 455 colleges' award letters, and 24 did not even use the word “loan.”
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Acknowledgements
We thank the Lumina Foundation for their financial support. We also thank Miguel Palacios for his prior research on this topic and his useful insights on our analysis. The views contained herein are not necessarily those of the Lumina Foundation. All errors, omissions, and conclusions are our own.
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Evans, B.J., Boatman, A. & Soliz, A. Framing and Labeling Effects in Preferences for Borrowing for College: An Experimental Analysis. Res High Educ 60, 438–457 (2019). https://doi.org/10.1007/s11162-018-9518-y
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DOI: https://doi.org/10.1007/s11162-018-9518-y