Slowing the ‌vicious Cycle�: The Effects of Reducing the Interest Rate on Child Support Arrears

Background: Many noncustodial fathers owe an amount of child support that is greater what they are able to pay. When these fathers do not pay the amount owed, arrears begin to accumulate, and interest is typically charged on the unpaid balance - making it more difficult for fathers to catch up. In 2019, the amount of arrears owed throughout the US totaled more than $115 billion, highlighting the significance of the problem.

Policymakers have considered several alternative policies to reduce this debt. In 2014, Wisconsin implemented a pilot program that reduced the amount of interest due on child support arrears from 1 percent per month to 0.5 percent per month. One impetus for the change was the belief that reducing the interest rate, and thereby reducing the amount of interest that accumulates, would incentivize the payment of arrears. In this paper, we analyze patterns of arrears accumulation and payment on arrears before and after this policy change to see whether the policy had its intended effect.

Data and Methods: Our main data come from administrative records from the child support system and include information for all child support cases in the state. We have merged these data with other administrative records, including earnings and public program participation. Our sample is 273,598 noncustodial parents (NCPs) with an open case throughout the 12 months before and after the policy change. We perform our analysis on several subgroups of NCPs, including those with no arrears and those owing the highest arrears. We conduct bivariate and ordinary least squares (OLS) regression analyses. We also use latent growth curve analysis to estimate NCPs trajectories of change in arrears owed (total and interest) before and after the policy change.

Results: Overall, the policy change had a significant effect on average total arrears growth and average interest growth, with individual’s post-implementation mean slopes increasing less rapidly in terms of total arrears ($31) and interest ($30) compared to the year prior to implementation. More importantly, we find that payments toward interest increased by $10 per year and payments toward total arrears (principal plus interest) increased by $19 per year. These findings suggest that the interest rate reduction policy did have its intended effect in reducing the growth of arrears and increasing payments on arrears.

Conclusion and Implications: While these analyses do not definitively show a causal relationship between lowering interest and increased payments, the relationships are generally robust to controlling for other factors and across different subgroups. We view this as suggestive evidence that lowering the interest rate on arrears is beneficial. The additional penalties associated with high interest charges may not be needed to motivate NCPs to pay. Evidence from this study may inform evidence-based decision-making in other states regarding the practice of charging interest on child support arrears. If findings across jurisdictions consistently show payments toward arrears increase with a reduction in interest, states implementing policies reducing arrears interest rates may be able to increase the number of resources available to economically vulnerable children.