Blind Optimism and Student Loan Debt

This paper analyses potential links between extreme optimism and student loan debt. Prior work finds extreme optimism to be associated with imprudent household savings and investment decisions. This paper explores whether these findings are relevant to student loan decisions. Using the most recent administration of the Survey of Consumer Finances (SCF), we present evidence that extreme optimists tend to be over-indebted with higher student loan balances, in absolute terms and relative to income. They are less likely to make payments on their student loan debt or reduce their loan balance. Extreme optimists are also more likely to take out loans for a degree they do not obtain and to enroll in income-based repayment plans. [This paper was presented virtually on September 27, 2022 at the 2022 Academy of Financial Services (AFS) Annual Meeting.]