Go Big or Buy a Home: The Impact of Student Debt on Career and Housing Choices
What is the impact of student loans on college graduates' choices? Using within-college supply-side variations in financial aid policies, we show that higher student debt balances cause a front loading of earnings, lower graduate school enrollment, and earlier entry into home ownership. We then estimate a life-cycle human capital model to analyze the mechanisms behind the interaction between student debt, graduate school enrollment and housing choices. Our structural estimation shows that post-school credit constraints generate a trade-off between career and housing choices for highly indebted graduates, playing a key role in explaining lifetime earnings inequality. Finally, we compare alternative policy proposals. Relative to the baseline 10-year fixed repayment plan, an income-based repayment plan (and a more ambitious undergraduate student loan forgiveness plan) increases human capital accumulation and earnings growth for highly indebted graduates, while postponing entry into homeownership.
Labor Economics, Inequality, Household Finance, Economics of Education