Analyzing the Effects of Lowering Interest Rates on Child Support Arrears

Background: Many noncustodial parents (NCPs) owe an amount of child support that is greater than their ability to pay. If they do not pay the amount owed, arrears accumulate, and interest is typically charged on the unpaid balance, making it more difficult for them to catch up. In 2019, the amount of arrears owed nationally totaled over $115 billion, highlighting the issue’s significance.

Policymakers have considered several policies to reduce this debt. In 2014, Wisconsin reduced the interest rate on child support arrears from 1%/month to 0.5%/month. One impetus for the change was the belief that reducing the interest rate would not only slow the growth of arrears but also incentivize the payment of arrears. In this paper, we analyze patterns of arrears accumulation and payment on arrears before and up to 3 years after this policy change to see whether the policy had its intended effect.

Data/Methods: Data are drawn from the administrative records for the child support program in Wisconsin, merged with administrative records of earnings; data include information for all child support cases in the state. Data elements include child support orders and collections; how these collections are distributed (whether they are received by custodial parents or retained by the state and whether they are distributed to a current support account or to arrears); and arrears balances each month, including subaccounts for principal and interest.

We define our sample as NCPs with an open case during the month before or after the policy change. We define an “open case” as having either a positive arrears balance or a child support order, payment, or distribution in one of these two months. Our analysis sample is thus those who do (or did) owe support, over 270,000 NCPs. We conduct bivariate and ordinary least squares (OLS) regression analyses; we use latent growth curve analysis to estimate NCPs trajectories of 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 trajectories of total arrears and interest increasing less rapidly compared to the year before implementation. Interestingly, our findings on total child support payments are mixed, with some analyses showing increases and some showing decreases following the policy change. These findings suggest that the interest rate reduction policy did have its intended effect in reducing the growth of arrears but may have the unintended consequences of disincentivizing child support payments.

Conclusion/Implications: While these analyses do not definitively show a causal relationship between lowering interest and changes in payments, the findings on the reduced growth in arrears are generally robust to controlling for other factors. It is unclear whether the additional penalties associated with high interest charges are needed to motivate NCPs to pay but lowering interest rates does result in lower debt burdens. Evidence from this study may inform evidence-based decision-making in other states regarding the practice of charging interest on child support arrears.