In this period of political dysfunction, we could use some good news. Fortunately, there is some. Small reforms, costing little, can have a major effect on people’s lives.
Consider the area of education. Low-income students are less likely to apply to selective colleges than their high- income peers. That’s a big problem, because students who attend selective colleges can obtain significant economic returns, and those returns are especially large for low-income students. What might be done to encourage them to apply? Research by Harvard economist Amanda Pallais provides some intriguing answers.
Before 1997, those who operated the ACT allowed students to send reports of their test scores to three colleges free; any additional report cost $6. In 1997, the ACT increased the number of free reports to four.
The small step made a big difference. Before 1997, 3 percent of those who took the ACT sent out four reports, whereas 82 percent sent out three. After 1997, 74 percent sent out four reports, whereas 10 percent sent out three. Although the increase in actual applications wasn’t so dramatic, it was nonetheless significant for both low-income and high-income students.
Here’s the crucial finding. After 1997, more low-income students who took the ACT ended up attending selective colleges. The apparent reason is that the shift from three to four reports led low-income students, but not their high-income counterparts, to apply to stronger colleges.
That wider net mattered. Pallais shows that as a result of attending more selective colleges, lower-income students received a significant boost in their expected earnings. Her striking evidence suggests a small proposal: Next fall, both the ACT and SAT should make it easier and cheaper for students to send out free reports. The benefits could be very high.
In 2009, Congress enacted the Credit Card Accountability Responsibility and Disclosure Act. One of its provisions is a small nudge: Every month, companies must disclose the interest savings from paying off the full balance within 36 months, instead of making only minimum payments every month. The goal of the nudge is to show consumers that if they keep making minimum payments, they might well lose a lot of money.