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Debt, Human Capital, and the Allocation of Talent

Author

Listed:
  • Titan Alon
  • Natalie Cox
  • Minki Kim

Abstract

In the presence of credit frictions, student debt may prevent graduates from realizing the full returns to a college education by distorting their occupation choice and subsequent early career investments in human capital. This paper quantifies the aggregate size of these labor market distortions by computing the effect of large-scale student debt forgiveness policies. The model’s predictions are disciplined by new empirical evidence showing that more student debt leads to higher initial earnings, but lower returns-to-experience. The quantitative results suggest that rising student debt is having a substantial adverse effect on aggregate labor productivity and the occupational composition of employment.

Suggested Citation

  • Titan Alon & Natalie Cox & Minki Kim, 2025. "Debt, Human Capital, and the Allocation of Talent," CRC TR 224 Discussion Paper Series crctr224_2025_635, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2025_635
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp635
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    More about this item

    Keywords

    Student debt; occupation choice; wage profiles; credit constraints; misallocation of talent; college; higher education; labor productivity.;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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