Job Search under Debt: Aggregate Implications of Student Loans

Abstract

A dynamic equilibrium model of schooling, borrowing, and job search is developed to quantify the aggregate implications of student loans. In my model, risk-averse agents under debt tend to search less and end up with lower-paid jobs. Calibrating the model using micro data, I show that student loans have significant effects on borrowers' job search decisions under the fixed repayment plan. The income-based repayment plan (IBR) largely alleviates the burden of debt repayment by insuring labor market outcomes, allowing borrowers to conduct a more adequate job search. In general equilibrium, IBR also increases social welfare by encouraging college attendance.

Keywords: student loan debt, search frictions, reservation wage, risk and liquidity, income-based repayment plan.

JEL Classification: E2, E6, J3, J6.