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Constrained After College: Student Loans and Early Career Occupational Choices

Author

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  • Jesse Rothstein

    (Princeton University)

  • Cecilia Elena Rouse

    (Princeton University)

Abstract

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.

Suggested Citation

  • Jesse Rothstein & Cecilia Elena Rouse, 2007. "Constrained After College: Student Loans and Early Career Occupational Choices," Working Papers 18, Princeton University, Woodrow Wilson School of Public and International Affairs, Education Research Section..
  • Handle: RePEc:pri:edures:18
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    File URL: http://arks.princeton.edu/ark:/88435/dsp017h149p90s
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    References listed on IDEAS

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    1. Thomas Crossley & Hamish Low, 2011. "Borrowing constraints, the cost of precautionary saving and unemployment insurance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(6), pages 658-687, December.
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • I20 - Health, Education, and Welfare - - Education - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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