Debt and Human Capital: Evidence from Student Loans
58 Pages Posted: 20 Jan 2017 Last revised: 1 May 2017
Date Written: April 18, 2017
This paper investigates the effect of debt on human capital. Using data from a random sample of the universe of federal student loan borrowers in the US, we document a negative relationship between the level of undergraduate student debt and graduate school enrollment. We identify off variation in student debt: 1) within school by cohort, and 2) induced by large tuition changes that affect differentially students within the same school across cohorts. We find that $4,000 in higher debt reduces the probability of enrolling in graduate school by 1.3-1.5 percentage points relative to a 12% mean. This effect is largely driven by credit constraints, declines 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.
Keywords: Student Debt, Human Capital, Postgraduate Education, Credit Constraints, Debt Overhang
JEL Classification: D14, H52, H81, J24, I23
Suggested Citation: Suggested Citation