Association for Public Policy Analysis & Management

Panel: Student Loan Debt and Repayment

(Education)

This panel explores the consequences of holding student debt on a variety of later life outcomes such as future human capital formation, labor market outcomes, and investment in risky financial assets. It also explores whether enrollment in income-driven repayment (IDR) plans affects future financial outcomes of students. Are students’ graduate school decisions affected by prior student loan holdings? Do student loan holdings affect the jobs students seek in the labor market? Do student loans affect where students choose to invest in future? Does enrollment in IBR matter for future homeownership, default, consumption and credit scores? These are some of the questions that this panel explores. Each paper leverages novel sources of data, innovative methods, and answer policy relevant questions that inform how student debt affects future economic and financial well-being of individuals and whether enrollment in IDR can potentially improve these outcomes.

The first paper investigates the effect of debt on human capital. It finds a strong negative relationship between the level of undergraduate student debt and graduate school enrollment. It finds 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 personal finance training in high school.

 Using repeated representative samples of college graduates and exploiting within college across-cohort variation in financial aid policies, the second paper finds that higher student debt causes college students to take jobs with higher wages and lower job satisfaction.

The third paper finds that student debt is negatively related to the extent of investment in risky financial assets by households using data from the Survey of Consumer Finances (SCF). An increase in student debt as a result of the 1992 Higher Education Amendments significantly reduced portfolio risk-taking for individuals already in four-year college at the time of these regulations. Further, the removal of bankruptcy dischargeability of student loans by the Higher Education Amendment Act of 1998 also reduced the extent of portfolio risk-taking. The negative relation between student debt and personal portfolio risk-taking is stronger for financially constrained households.

The fourth paper estimates the causal impact of IDR on repayment rates, balances, homeownership, and consumption proxies using a novel dataset linking the first administrative panel of federal student loan payments to credit bureau records for over one million student borrowers. Within seven months of take up, IDR enrollees are 21 percentage points less likely to fall delinquent and pay down $90 more student debt each month compared to those who remain on standard repayment plans. IDR enrollees have credit scores that are 7.5 points higher, hold 0.1 more credit cards, and carry $240 higher credit card balances than non-enrollees one year after the servicing call, implying increased short-term consumption out of liquidity. IDR enrollees are also 2 percentage points more likely to hold a mortgage, suggesting a positive effect of IDR on homeownership.