In the early 2000s, a highly selective university introduced a —no-loans“ policy under which the loan component of financial aid awards was replaced with grants. We use this natural experiment to identify the causal effect of student debt on employment outcomes. In the standard life-cycle model, young people make optimal educational investment decisions if they are able to finance these investments by borrowing against future earnings; the presence of debt has only income effects on future decisions. We find that debt causes graduates to choose substantially higher-salary jobs and reduces the probability that students choose low-paid —public interest“ jobs. We also find some evidence that debt affects students‘ academic decisions during college. Our estimates suggest that recent college graduates are not life-cycle agents. Two potential explanations are that young workers are credit constrained or that they are averse to holding debt. We find suggestive evidence that debt reduces students‘ donations to the institution in the years after they graduate and increases the likelihood that a graduate will default on a pledge made during her senior year; we argue this result is more likely consistent with credit constraints than with debt aversion.
The returns to a college degree have risen substantially in recent years, but the cost of higher education has risen even more quickly. Between 1993 and 2005, the college wage premium rose by 27 percent (Mishel, Bernstein, and Allegretto 2007)1, while real tuition and fees at public and private four-year colleges rose by 63 percent and 43 percent, respectively (Trends in College Pricing 2005, Table A1).2 These rising costs have made financial aid more important. The proportion of full-time, full-year undergraduates receiving financial aid rose from 58.7 percent in 1993 to 76.1 percent in 2004 (Snyder, Tan, and Hoffman 2006, Table 320).
As aid packages have grown, so has the importance of student loans. The proportion of students on aid who take out at least some loans rose from 55 percent in 1993 to 65 percent in 2004; over the same period, the proportion receiving grant aid fell slightly, from 83 to 82 percent (authors‘ calculations based on Snyder et al. 2006, Table 320). As a result, college graduates‘ debt burdens have risen. The average college graduate in 1993 had incurred $8,462 in student debt. In 2004, this had risen to $13,275. Among those with positive debt, the average rose from $12,565 in 1993 to $20,386 in 2004.3.
Some argue that the looming need to make loan payments leads students with debt to major in career-oriented fields or to choose more lucrative post-graduation jobs than would be otherwise optimal.4 They also argue that educational debt deters individuals from purchasing homes or getting married, or assuming other responsibilities typically associated with full-fledged adulthood (Chiteji 2007).
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Constrained After College: Student Loans and Early Career Occupational Choices
