In this study, the authors use a survey-based experiment to understand student income insurance demand across two different income-contingency implementations and the potential relevance of adverse selection on future income and employment prospects. They conduct a survey-based experiment with 2,776 students at a large nonprofit university, offering students a hypothetical choice: either a federal student loan with income-driven repayment or an income-share agreement (ISA), with randomized framing of downside protections (nature of income contingency and maximum term).
Emphasizing income insurance features for both options increased ISA uptake by about 10 percentage points, or 43 percent. There is limited evidence of heterogeneity in treatment to be found along demographic, academic, or financial lines for students in the sample. The insurance framing has, by far, the largest effect on take-up. The authors do find strong suggestive evidence of adverse selection based on the likelihood of future incomes being low.
The results suggest that students are not necessarily thinking about income risk or about the potential benefits of educational insurance when they choose how to finance their studies, but that educational and loan providers can help make the potential need for educational insurance salient for borrowers by thoroughly explaining the costs and benefits of such insurance. The authors further observe that students are responsive to changes in contract terms and possible student loan cancellation, which is evidence of preference adjustment or adverse selection. Overall, the results indicate that framing specific terms can increase demand for higher education insurance to potentially address risk for students with varying outcomes.
View the Full Working Paper