Student debt and behavioral bias: a trillion dollar problem

TL;DR

This review explores how behavioral biases influence students' loan decisions and examines the potential of social media to improve financial literacy and debt management among young borrowers.

Contribution

It highlights the impact of cognitive biases on student loan choices and proposes leveraging social media to enhance financial literacy and debt repayment strategies.

Findings

Behavioral biases significantly affect student loan demand and repayment choices.

Social media has potential to improve financial literacy among students.

Understanding cognitive biases can inform better policy and educational interventions.

Abstract

This literature review elucidates the implications of behavioral biases, particularly those stemming from overconfidence and framing, on the intertemporal choices made by students on their underline demand preferences for student loans. A secondary objective is to understand the potential utility of social media to assist students and young borrowers with the debt repayment process and management of their loan tenures. A close examination of the literature reveals a substantial influence of these behavioral and cognitive principles on the intertemporal choices made by students towards debt repayments. This affects not only the magnitude of loans they acquire but also the anchoring of the terms of loan conditions associated with repayment. Furthermore, I establish that harnessing social media as the potential to cultivate financial literacy and enhanced understanding of loan terms to expedite the process of debt redemption. This review could serve as a valuable repository for students, scholars, and policymakers alike, in order to expound on the cognitive biases that students and consumers often face when applying and entering into loan contract.