Go Big or Buy a Home: The Impact of Student Debt on Career and Housing Choices

Abstract

What is the impact of student debt on career and housing choices for college graduates? Exploiting supply-side variations in college grants, we show that student debt causes a persistent decrease in graduate school enrollment and earnings growth, but no delay in first-time home ownership. We then estimate a life-cycle human capital model and show that student debt imposes significant pecuniary and non-pecuniary trade-offs between career and housing choices, contributing to long-term earnings inequality. In addition, we analyze alternative student debt repayment plans. Relative to the baseline 10-year fixed repayment plan, an income contingent plan increases human capital and earnings growth, while a student debt forgiveness plan would only provide marginal additional earnings growth for indebted graduates.

Keywords: Student Loans, Human Capital, Housing

JEL Classification: I22, E24, J32, J38, R21