Measuring Aversion to Debt: An Experiment Among Student Loan Candidates

Abstract

Debt aversion, an unwillingness to enter into a financial contract framed or labeled as debt, distorts household investment and financing decisions. We test through an experiment for the presence of debt aversion among a relevant population. The tests allow us to identify two sources of debt aversion: one due to framing (as debt or as an income-contingent contract) and another due to labeling (as a loan or as a human capital contract). Most of the debt aversion we identified was due to labeling. Labeling a contract as a loan decreased its probability of being chosen over a financially equivalent contract and increased its perceived cost.