Managing Debt

Justine PETERSEN: Loan payment reminders

During times of crisis, a little encouragement can go a long way. A recent study conducted by Ideas42 aimed to nudge college students into using student support services through periodic SMS reminders. The Ideas42 team found that students who received weekly SMS reminders with encouraging messages were more likely to have positive educational outcomes than those who did not. In this experiment, we partnered with Justine PETERSEN, a St. Louis-based Community Development Finance Institution (CDFI) to see how the concept of encouragement could translate to increased loan repayment among small business borrowers.

Targeted reminder messages have been shown to help individuals meet a wide range of financial goals, including loan repayment. Additionally, previous research has indicated that simply by developing a plan for executing a goal can increase the likelihood of following through on a wide range of goals. In this experiment, we test how restructured loan repayment reminder messages that use small business owners’ goals and their own words of encouragement can affect the loan delinquency rates of Justine PETERSEN’s small business loan borrowers.

We are currently finalizing a four-part experiment to test the best way of achieving this goal. Interventions will include SMS payment reminders, simple goal setting and reminders, and finally, a “financial health first-aid kit” which will remind participants of their goals with personalized SMS reminders.

Foundation Communities: Increasing affordability through FAFSA

As the cost of college continues to rise, it has become increasingly important for students to apply for financial aid. However, the process of completing the Free Application for Federal Student Aid (FAFSA), which requires detailed information on a student’s family composition, income and other household assets can be daunting for many low-income students.

To better understand how we could nudge students to complete their FAFSA, we partnered with the College Hub, a program of Foundation Communities, a community non-profit organization in Austin, Texas that assists clients in completing and submitting their FAFSA and Texas Application for State Financial Aid (TASFA).

We used behavioral insights to nudge students to sign up for FAFSA by focusing on benefits-framed messaging, highlighting how filling out the FAFSA could make college more affordable, and included testimonials from the FC team describing how they have personally benefited from filling out the FAFSA.

Preventing deliquencies

Falling behind on debt payments can happen for a number of reasons, including procrastination, inattention, financial constraints, and a misunderstanding of the costs of delinquent payments (e.g., higher borrowing costs in the future). Regardless of the reasons, these delinquent payments can pose financial risks to households. Sometimes these risks are small, like a modest decline in a credit score, and sometimes these risks are large, like a loss of access to credit or vehicle repossession.

Given the diversity of potential reasons for payment delinquencies, we wanted to compare a diverse array of behavioral interventions—some common, some less common—to determine which approach was most effective at preventing debt payment delinquencies. To do so, we partnered with Midwest credit union to implement an experiment incorporating emailed payment reminders, reminders placed on refrigerator magnets, and access to a new type of savings account, each of which may impact payment delinquencies through different behavioral channels.

We developed an experiment to test the efficacy of email reminders, magnet reminders, and a savings intervention at helping debt-holding credit union members prevent payment delinquencies. The measured outcomes will be drawn from credit union data and include the incidence and frequency of debt payment delinquencies, the length of delinquencies, savings amounts, the incidence of setting up automatic debt payments, and the rate of opening Rainy Day Savings Accounts.

Payment reminders and financial counseling

Payment reminders and financial coaching and counseling services are two key ways by which programs can help people stay on track with their debts. Payment reminders, which alert people to an upcoming payment due date, are an extremely low-touch way of doing so. Financial coaching and counseling services, which work directly with clients to identify and address their financial needs and goals, represent a high-touch way of keeping people on track with their debt obligations.

We wanted to test the extent to which payment reminders could complement financial counseling services by partnering with a Midwest credit union and a multi-service community organization that provides financial counseling services. We designed an experiment testing the impact of offering indebted credit union members the opportunity to receive free financial counseling from an external organization coupled with debt payment reminders provided by the credit union in order to help them avoid delinquencies on their debt payments.

Measured outcomes of the experiment will include the rate of financial counseling take-up as well as an array of relevant financial indicators captured through credit union data, including checking and savings account balances, account opening behavior, debt payment delinquencies, and new debts incurred.

Behaviorally-informed deliquency notices

Payment delinquencies can have high direct and indirect costs for households. Even modest payment delinquencies can incur fines and fees, while longer-term delinquencies may result in foreclosures, repossession, and substantial harm to credit scores. While there has been ample research on ways in which behavioral economics can help prevent payment delinquencies—through the use of payment reminders or setting up automatic payments, for example—there is less work on ways in which nudges can help households “cure” existing delinquencies.

We wanted to investigate the extent to which behaviorally-informed delinquency notices could impact the rates of households becoming current on their debt payments. To do so, we partnered with a Midwest credit union to design delinquency notice emails that would be delivered to any members who became delinquent on their installment debt payments.

This experiment was launched in September 2020, to 30,000 debt-holding credit union members and is currently in the field. Key outcomes for this study will be drawn from credit union data and include the rate of delinquency resolution, the time to delinquency resolution, and the occurrence of future delinquencies.