Association for Public Policy Analysis & Management

This paper investigates the effect of debt on human capital and finds a strong negative relationship between the level of undergraduate student debt and graduate school enrollment. We identify off variation in student debt: 1) within school by cohort, and 2) induced by large tuition changes that affect differentially students within the same school across cohorts. We find that $4,000 in higher debt reduces the probability of enrolling in graduate school by 1.3-1.5 percentage points relative to a 12% mean. This effect is largely driven by credit constraints, declines with family income, and is attenuated for students who had compulsory personal finance training in high school. The results highlight an important trade off associated with debt-financing of human capital, and inform the debate on the effects of the large and increasing stock of student debt in the US.