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Debtor Students Don’t . . .

May 31, 2007

I saw this over at Insidehighered today:

“Students with more debt are more likely to focus on preparing for high salary jobs and are likely to make smaller donations to their alma mater after graduation, according to new research published by the National Bureau of Economic Research” (NBER).

Here’s the abstract from the NBER paper:

“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.”

Do we really need a social science study to tell us that there is “some evidence” debt affects academic decisions during college? Do we need extra research to inform us that debtor graduates are less likely to give back to their alma maters or take ‘public interest’ jobs?

I’ll save NBER some research money and provide them, pro bono, with some more things debtor students are less likely to do – both before and after graduation. Here are my two bleak lists (please pardon the repetition, but it makes a point):

1. College students who are tired, worried about debt, and holding extra jobs are less likely to:

– Study abroad;
– Earn liberal arts degrees;
– Take risks with new courses to learn something different (efficiency matters);
– Read for pleasure;
– Care about the news or current events;
– Get involved in politics;
– Give or go to churches;
– Volunteer;
– Maintain solid support networks;
– Eat right (fresh food is expensive);
– Exercise; and/or
– Maintain or build a savings account.

And we should remember that since college is often a part of one’s prolonged adolescence, some of these problems will become lifelong.

2. College graduates who are tired, paying off debt, and holding extra jobs are similarly less likely to:

– Save for retirement;
– Build or maintain savings accounts;
– Give or go to churches;
– Volunteer;
– Eat right (same as above);
– Exercise;
– Read for pleasure;
– Care about the news or current events;
– Start families in their prime child-bearing years;
– Maintain solid support networks;
– Have time for extended family;
– Get involved in politics; and/or
– Afford to buy homes.

Readers, have I forgotten anything?

In making these lists, I’m most struck by this point: The student loan system is actually borrowing against future excess earnings that otherwise might have been devoted to charity – whether in terms of money or time used for churches or other service organizations.

A heavily used loan system only makes sense if higher education is not a public good. If an individual benefits from his/her education more than society does, then higher individual debt loads are justified. But if one’s society benefits as much or more from one’s education as does the individual, it would make sense for society to defray the cost of that education. – TL


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One Comment
  1. Ugh. This is sobering stuff. I wonder how many financial aid offices worry about these type of consequences when they are helping students take on ever bigger and bigger debt.


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