Using financial tips to guide debt repayment: Experimental evidence from low- and moderate-income tax filers

Abstract

Tax filing in the U.S. often has substantial implications for the debt burdens of low- and moderate-income (LMI) households. The tax refund—often the largest payment LMI households receive in a year—provides these households with an opportunity to reduce their debt, while tax liabilities can lead them to take on additional debt. Though paying down debt is among the most common uses of the tax refund, households often do not optimally allocate their debt payments. We assess whether offering simple financial guidance can help households meet their debt obligations by administering a field experiment that provided debt management tips to LMI tax filers after tax filing. Four treatment groups saw one of four tips, while a fifth treatment group could select which of the four tips was best suited to their financial situation. Results from a follow-up survey found no effects of the intervention on reported rates of following the tips or on the amount of debt held. However, we do find that the tips reduced the incidence of holding unsecured debt by 5 percentage points (p<0.05). The primary drivers of these effects were tips advising participants to prioritize paying their smallest debt balance or their highest cost debt.