GO BIG OR BUY A HOME: New evidence on US student debt, career choices and wealth accumulation

Between 2004 and 2018, outstanding student debt tripled in the United States, reaching a combined amount of $1.46 trillion in value held by 44 million borrowers. New research by Marc Folch and Luca Mazzone shows that those students carrying higher amounts of student debt actually enter home ownership relatively early, but at the expense of their educational achievement and earnings potential in the longer run. 

Their study, to be presented at the annual congress of the European Economic Association in August 2020, uses data from a representative panel of US college graduates to investigate a common trade-off for young workers: investing in long-term earning potential versus accessing home ownership.

The authors confirm a common finding in research: high-debt borrowers choose careers with high initial earnings. On the other hand, they show, those borrowers are less prone to invest in additional education or commit to a career in which high potential earnings are delayed or risky. At the same time, the authors reveal that individuals with higher debt balances are relatively more likely to access home ownership in post-graduation years. 

The study goes on to build a model, estimated on US data, to compare the effects of different types of education finance policy. Income-based repayment plans and broader debt forgiveness plans emphasise reducing the impact of debt on choices made soon after graduation. 

The two types of policy have similar effects, in spite of the difference for the government’s budget: they increase enrolment in post-bachelor programs and in careers with higher earnings growth. In short, they allow borrowers to forego high immediate earnings and instead invest in their earning potential.

Interestingly, these policies also affect the average age of entry into home ownership- but by bringing it up instead of down. This delay in home ownership shows that selection into a career or education channel is more impactful than immediate financial relief offered by cancelled or postponed payments. 


The first empirical finding is that undergraduate debt pushes graduates to look for higher initial earnings and lower earnings growth from there on: on average, increasing debt balances by 10% has an effect of increasing earnings one year after graduation by 2.9%. On the other hand, the same graduates would see an average fall of 1.02% in their earning growth during the following three years. 

Co-author Marc Folch comments on the empirical results: ‘Our paper is the first to clearly show how student debt exacerbates the trade-off between housing and human capital investment and leads graduates to search for higher wages, at the expense of future growth.’ 

Folch and Mazzone identify various sources for this different earnings dynamics. First, they show that indebted students make on average different occupational choices. Occupations are classified as ‘steep’ careers if they are in the top quintile of earnings growth between age 25-30 and age 45-50. As debt balances grow, their likelihood to choose that occupation decreases.

Second, increasing debt balances has a negative effect on post-bachelor degree attendance and completion: this is extremely relevant, as attending graduate studies is a gateway to access a range of occupations with higher earnings growth potential. 

There is a third effect, however, that is less intuitive: as all graduates value access to home ownership, they see a trade-off between being able to afford it early on and further investments in their education and human capital. Student debt puts this trade off under additional stress, and pushes some students into earlier home ownership, by giving up their option of getting further education. 

While the last result is suggested by empirical evidence, as increasing debt balances by 10% increases chances of access to home ownership in the following years by 5%, the paper is able to more clearly illustrate the trade off through the workings of a life cycle model, estimated on aggregate US data. 

The model highlights three important facts: 

  • Non-monetary returns to investment in housing and education are large, and important in explaining observed behaviour: were housing choices not valuable to graduates, student debt would barely affect their career or further educational choices.
  • A cascade of consequences for income and wealth inequality depends on small differences in the financial position of young workers. 
  • Because of this fact, a reform that links payments to income is almost as effective at reducing the impact of student loans on income inequality as debt forgiveness, but with costs for the taxpayer that are lower by many orders of magnitude. 


Co-author Luca Mazzone comments on the results: ‘It is important to highlight what policies should target – the debate on education financing needs to focus on how young workers are affected in practice by having to make certain payments after graduation’ 


Contact and info 

Marc Folch is a PhD candidate from the University of Pennsylvania Economics Dept.

Luca Mazzone has a PhD in Economics from the University of Zurich and the Swiss Finance Institute, and will join the Fiscal Affairs Dept. of the International Monetary Fund in the Fall.

Authors’ email: 

Folch: mfolch@sas.upenn.edu
Mazzone: luca.g.mazzone@gmail.com