| Abstract: |
In the early 2000s, a highly selective university introduced a "no-loans"
policy under which the loan component of financial aid awards was replaced
with grants. We use this natural experiment to identify the causal effect of
student debt on employment outcomes. In the standard life-cycle model, young
people make optimal educational investment decisions if they are able to
finance these investments by borrowing against future earnings; the presence
of debt has only income effects on future decisions. We find that debt causes
graduates to choose substantially higher-salary jobs and reduces the
probability that students choose low-paid "public interest" jobs. We also find
some evidence that debt affects students' academic decisions during college.
Our estimates suggest that recent college graduates are not life-cycle agents.
Two potential explanations are that young workers are credit constrained or
that they are averse to holding debt. We find suggestive evidence that debt
reduces students' donations to the institution in the years after they
graduate and increases the likelihood that a graduate will default on a pledge
made during her senior year; we argue this result is more likely consistent
with credit constraints than with debt aversion. |