Brown Bag May 18 - Debt and Human Capital: Evidence from Student Loans
Andres Liberman, New York University, Stern
2017-05-18 at 12:00
2017-05-18 at 13:30
Swedish House of Finance, Drottninggatan 98, Stockholm
This paper investigates the dynamic relation between debt and investments in human capital. We document a negative causal effect of the level of undergraduate student debt on the probability of enrolling in a graduate degree for a random sample of the universe of federal student loan borrowers in the US. We exploit exogenous variation in student debt induced by tuition increases that affect differentially students within the same school across cohorts. We find that $4,000 in higher debt causes a 1.5 percentage point reduction in the probability of enrolling in graduate school relative to a mean of 12%. Further results suggest this effect is largely driven by credit constraints, is monotonically weaker 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.