THE STUDY APRIL 24, 2012
Centrists, rejoice! Barack Obama and Mitt Romney have finally found one thing they can agree on: extending low rates on government-subsidized student loans. Worried about burgeoning student loan debt and the youth vote, both candidates have embraced a plan to extend the current lowered rates on federally-subsidized Stafford loans. How does student loan debt affect the lives of young college graduates?
One theory of student loans argues that since debt represents a small portion of lifetime income, its long-term influence on graduates should be rather small and limited to income and consumption—not career choices. But according to a 2008 study, that assumption is “not borne out by the data.” To the contrary, student loan debt “causes graduates to choose substantially higher-salary jobs and reduces the probability that students choose low-paid ‘public interest’ jobs.” Taking advantage of a natural experiment in which one selective university decided to abandon loans in favor of no-strings-attached grants, the authors studied the career choices of “otherwise-identical students who graduated […] with very different debt positions.” In order to control for external factors like the state of the economy, they also studied students who received no financial aid. They found that an extra $10,000 in debt reduces a graduate’s likelihood of working in nonprofits, education, or government by as much as 5 or 6 percentage points. An extra $10,000 in debt also leads students to take jobs that pay, on average, about $2,000 more in annual salary. Why didn’t the standard assumption hold? The authors guess that recent graduates may be particularly debt-averse, or that they may face difficulty borrowing against their future earnings. That suggests that student loans aren’t just creating a risky debt bubble; they’re substantially distorting graduates’ choices of how best to make use of their educational investments.