"Don’t let your emotions get the best of you."
You’ve likely tried to follow this advice when faced with a big decision, only to find that it’s far more easily said than done. While you pore over options for refinancing your student loans, there are gears shifting just below the surface of your consciousness that can inadvertently steer you wrong or even paralyze your decision-making ability, causing you to do nothing at all.
You might attribute your reluctance to make a decision to a variety of factors, but there are actually psychological reasons that explain why you may put off these big decisions. According to behavioral economics researchers, we all have inherent cognitive biases that could cloud our judgment and lead us to make less optimal choices, even when better options are staring us straight in the face. This is as true for baseball executives evaluating amateur players (as depicted in Michael Lewis’s Moneyball) as it is for students financing their educations.
This might explain why you’re struggling to make a decision on if you should refinance your student loans. The good news is, it’s not just you, and there are well-studied psychological theories that explain the hemming and hawing that you might experience when considering refinancing. Read on to understand the theories, how they apply to student loan refinancing, and how to push past them to make the best decision for your individual situation.
The Concept: A Science magazine article from 1981 posited that the way something is framed affects how it will be received, and therefore acted upon. For example, a 2011 Cirano study showed that Canadian high school students choosing from a list of college financial aid packages were likely to select a certain amount of grant aid but would then refuse the same package when an optional loan was attached to it, because the grant and loan were presented together.
The Application: Perhaps you took out loans as an undergraduate because of the way the offers were framed, but ultimately felt burned by the small print or nuanced language you didn’t notice or fully understand. Maybe you feel duped or embarrassed that you didn’t know what you were getting into and ended up owing significantly more than you had thought.
The Pep Talk: Now that you’ve graduated and you’re eligible to lower your student loan interest rate through refinancing, it’s understandable to be wary of offers from various lenders. So, now is the time to get curious: ask questions, read carefully, and arm yourself with information to make sure you can move forward with an offer in total confidence.
The Halo (or Horns) Effect
The Concept: This theory proposes that someone's impression of a person, place, or thing affects how he or she makes other judgments about it, either positively (a halo) or negatively (horns). For example, colleges plunk down millions of dollars to have successful football programs because the public perceives success on the field as success in the classroom, causing an uptick in applications.
The Application: The student loan industry in general gets a less-than-stellar reputation due to a few bad actors that have created negative experiences for borrowers. As a result, you may be less inclined to explore refinancing options because it means you have to think about your loans, a topic you thought was in your rearview mirror.
The Pep Talk: It's important to remember that not all lenders are created equal. You can, and should, compare lenders to find one that’s right for you, one that aligns with your values and one that makes student loan refinancing easier and more accessible.
Status Quo Bias
The Concept: Inaction is easier than action because people tend to feel more comfortable sticking with the known familiar rather than trying something new that could yield an uncertain outcome. We experience this bias for keeping things the way they are because we think any deviation from the current situation could possibly be a loss.
To illustrate this: Imagine two investors who become aware of $1,200 losses, one of whom lost the money as a result of changing his stock choice, the other one simply left the status quo of his portfolio in place and experienced the loss anyway. The investor whose loss was a result of his action felt more regret than the peer who let things continue as they were.
The Application: While it might be tempting to put off refinancing, you may be losing money every month that you’re keeping your current rate. This internal bias is holding you back.
The Pep Talk: Take a moment to do the calculations and find out how much your current inaction might be costing you. It’s also helpful to read the hopeful stories of people who have taken action to refinance their student loans and have no regrets.
Of course, we’re only human, and emotion comes into play with every decision-making process. But it’s important to be aware of how that emotion may cloud your actual options at the outset. Don’t let it blind you from making the best possible choice.