A mounting body of evidence suggests that behavioral factors, such as lack of self-control and an inability to remain focused on achieving a financial goal, impede individuals’ ability to accumulate wealth. Most financial products and policy instruments developed to overcome these behavioral issues focus on asset accumulation, such as retirement planning. For many households, however, debt reduction offers a more efficient path than asset accumulation to achieving greater wealth. Nevertheless, the availability of behaviorally-oriented financial interventions to reduce debt is far more limited, and additional research is needed to understand how such debt reduction programs should be structured and how they affect individuals’ financial health. This study is the first known evaluation to apply behavioral economics to debt reduction services.  

This study took place in 2010 in Tulsa, Oklahoma, a city located in the southern United States. Researchers partnered with the Community Action Project of Tulsa (CAP), an anti-poverty agency that provides a range of social services—including early childhood education, first-time homebuyer’s assistance, and free tax preparation—to low- and moderate-income individuals. The 465 participants of this study comprise individuals who sought tax preparation services from CAP under its Volunteer Income Tax Assistance program. 

 

The majority of participants in the sample were low-income, with 75 percent reporting a total annual household income of less than US$30,000, which is equivalent to the bottom 31 percent of the national income distribution¹. The average individual credit card and auto loan debt of the sample was US$2,447 and US$5,546, respectively, which was low relative to U.S. averages. The mean age of the sample was 44 years and 74 percent was female.

In 2010, researchers developed and piloted a program called Borrow Less Tomorrow (BoLT) to help CAP clients reduce their debt. During tax season (January-April), researchers and CAP staff asked tax preparation clients if they would be willing to complete a financial and behavioral survey in exchange for a US$5 gift card to a local gas station. Among the group that completed the survey, a total of 465 individuals were eligible to participate in the study because they had a positive balance on auto or credit card debt and had expressed interest in reducing their debt. All participants also granted permission for researchers to pull their credit reports on a regular basis to monitor debt payments and financial status. 

 

Researchers randomly assigned 238 individuals to be offered BoLT (the treatment group), and 227 individuals to not be offered BoLT (the comparison group). For those offered BoLT, the research team explained the program components to the participant and worked to identify a single, suitable debt on which to focus effort (e.g. a debt with a substantial balance and a high interest rate).

 

BoLT comprised three separate interventions:

Demand for debt reduction support: Overall, researchers found strong demand for behaviorally-motivated debt reduction support. Among those randomly assigned to receive the offer to participate in BoLT, 41 percent signed up for an accelerated repayment plan. Of those who signed up for the plan, 41 percent signed up to escalate payments every month. Conditional on take-up of BoLT, 27 percent accepted the offer to receive peer support and 81 percent accepted the offer to receive monthly reminder notices. Households living in extreme poverty (i.e. incomes less than US$10,000 per year) were less likely to sign up for BoLT, but there is no evidence that take up differed by whether a participant demonstrated more or less self-control or attention paid to her finances.

 

BoLT Performance: By monitoring credit reports, researchers found that 51 percent of BoLT participants were on-schedule with their repayment plan after 12 months in the program. The study demonstrated weak evidence that those who were offered the opportunity to participate in BoLT achieved a lower overall level of debt after one year than the comparison group, which did not receive the BoLT offer. However, many of the estimated differences in debt reduction between the treatment and comparison groups were not statistically significant. The researchers found no evidence of a difference in credit scores, payment delinquencies, or credit line use between the treatment and comparison groups.

 

While noting that these pilot results should be considered with caution due to limited sample size and the use of just a single program design, the researchers found strong demand for debt reduction products and services, but only suggestive evidence that this product led to improved financial well-being for participants. They posit that debt reduction products and services could be used by businesses and financial advisors to enable employees and clients to achieve their financial goals.