Student Loans: Implications for the Labor Market and Inequality
Paper Session
Sunday, Jan. 5, 2025 8:00 AM - 10:00 AM (PST)
- Chair: Lesley Turner, University of Chicago
Financial Frictions and Human Capital Investments
Abstract
How do financial frictions affect the type of human capital investments that students make in college? To study this question, I build a novel dataset covering more than 700,000 U.S. students, merging commencement records with address histories, credit bureau records, and professional resumes. I document that students trade-off initial earnings against lifetime earnings when choosing college majors, and that students from low-income families are more likely to choose majors associated with higher initial earnings but lower lifetime earnings. I provide causal estimates of how student debt affects this trade-off using the staggered implementation of Universal No-Loan Policies across 22 universities from 2001 to 2019. I find that students who are required to take on more student loans to finance their education choose majors with higher initial earnings but lower lifetime earnings. Furthermore, student debt differentially affects students depending on their family backgrounds: Students who grew up in low-income families display greater sensitivity to changes in student debt. Finally, I show that student debt leads to different job profiles and earnings later in life. Combined, these findings highlight the role of financial frictions in human capital investments and subsequent labor market trajectories.Insurance versus Moral Hazard in Income-Contingent Student Loan Repayment
Abstract
Student loans with income-contingent repayment insure borrowers against income risk but can reduce their incentives to earn more. Using a change in Australia’s income-contingent repayment schedule, I show that borrowers reduce their labor supply to lower their repayments. These responses are larger among borrowers with more hourly flexibility, a lower probability of repayment, and tighter liquidity constraints. I use these responses to estimate a dynamic model of labor supply with frictions that generate imperfect adjustment. My estimates imply that the labor supply responses to income-contingent repayment decrease the optimal amount of insurance but are too small to justify fixed repayment contracts. Moving from a fixed repayment contract to a constrained-optimal income-contingent loan increases welfare by the equivalent of a 1.3% increase in lifetime consumption at no additional fiscal cost.How Do Income-Driven Repayment Plans Benefit Student Debt Borrowers?
Abstract
The rapid rise in student loan balances has raised concerns among economists and policymakers. Using administrative credit bureau data, we find that nearly half of the increase in balances from 2000 to 2020 is due to deferred payments, largely driven by the expansion of income-driven repayment (IDR) plans, which link payments to income. These plans help borrowers by smoothing consumption, insuring against labor income risk, and reducing the present value of future payments. We build a life-cycle model to quantify the welfare gains from this payment deferment and the channels through which borrower welfare increases. New, more generous IDR rules increase this transfers from taxpayers to borrowers without yielding net welfare gains. By lowering the average marginal cost of undergraduate debt to less than 50 cents per dollar, these rules may also incentivize excessive borrowing. We demonstrate that an optimally calibrated IDR plan can achieve similar welfare gains for borrowers at a much lower cost to taxpayers, and without encouraging additional borrowing, primarily through maturity extension.Discussant(s)
Yuriy Gorodnichenko
,
University of California-Berkeley
Brad Hershbein
,
W.E. Upjohn Institute
Constantine Yannelis
,
University of Chicago
JEL Classifications
- I2 - Education and Research Institutions
- G5 - Household Finance