Once in Debt, Always in Debt? Effects of Student Loans on Debt Holdings

Abstract

Both student loans and household debt are at their peaks. This paper investigates how student loans causally impact debt holdings of individuals in the medium-run using data from the National Longitudinal Survey of Youth 1997. To identify the causal effect of student loans on future debt holdings, I instrument the amount of student loan debt with eligibility for merit grants, using a triple differences estimation in the first stage. I find that student loans mechanically increase debt holdings at age 25 but decrease debt holdings at age 30 by reducing credit card debt. I explore potential explanations for this decrease. I find that student loans positively impact the educational outcomes of students, but do not increase their risk aversion or impact their mental well-being. Furthermore, the effects are driven by individuals from poorer families. These results suggest that individuals with larger student loans reduce their borrowing because of education and credit constraint channels, but not because they become more averse to debt.

Keywords: Student Loans, Household Debt, Financial Aid

JEL Classification: I22, I23, D14