How Student Loans Shape Futures
American culture has forged a link between education, specifically higher education like college, and the idea of a comfortable and thriving lifestyle. Education has a reputation as a gateway to a better life. When economists think about returns on education, the profession paints a picture of education creating productive and efficient workers. These workers go out into the economy and create new companies or participate in the labor market, using their skills to achieve prosperity for themselves and the next generation of their household.
In recent decades, the cost of a college education has markedly increased. As a result, college graduates, who make up about a third of the U.S. population, tend to leave college with more significant student loan debt, debt which impacts decision-making in a critical time in life. A time in life when people think about investment decisions like buying homes and starting families. This backdrop provides a motive for economists to ask an important question: "what is the impact of policies like federal student loans that aim to make college more accessible?"
Yue Hua, a Ph.D. candidate here at the U of M, wrote a research paper titled "The Long-Run Effects of Federal Student Loans on Fertility and Social Mobility" to investigate the connections between federal student loans, intergenerational prosperity, and family formation. Below is a brief question and answer interview with Yue about her research. You can find out more about her research on her webpage.
Why investigate economic questions about student loans?
"While I was an undergraduate student in Hong Kong, student loans were not that big of a deal, but in the U.S., sizeable student debt burdens are becoming more common amongst people in their 20s, 30s, and 40s. So, I decided to look at how the financial constraints imposed by student loans impact decisions about family formation and whether federal student loans connect to social mobility. The idea behind federal student loans is that the government can subsidize education for poorer families, leading to higher income after college and increased social mobility for the next generation of the household."
What did your research find about how federal student loans impact social mobility?
"There are two competing factors that work in opposing directions. Federal student loans sometimes permit access to higher education. People who would not have otherwise been able to afford college gain access to loans that make higher education attainable. However, even though these individuals have higher incomes, the burden of paying back debt leads to less investment in children, decreasing the next generation's social mobility.
On the other hand, federal student loans also allow those who could have afforded a college education through private student loans to borrow funds for an education at a lower, subsidized, interest rate. These individuals have higher incomes but face comparatively relaxed credit constraints from debt.
Overall, these two factors cancel in aggregate. My research concludes that federal student loans do not substantially impact social mobility overall."
What relationship did you find between federal student loans and fertility rates?
"Similar to social mobility, there are a few competing factors:
- When I looked at the effect of college on incomes, I found that those who borrowed for higher education increased their income. This increase in income led to a rise in investment in children and a positive relationship between federal student loans and increased fertility.
- For more affluent parents, a more general substitution effect exists. Wealthier parents tend to have fewer children while investing more in each child, substituting quality for quantity.
- When people take on student loan debt, they may have a more constrained budget. Constraints during parenthood raise the relative price of early investment and lower the returns to late investment, i.e., college. This effect leads parents to substitute quantity for quality while also decreasing investment in children and increasing personal consumption.
The net result of these effects is an ambiguous relationship between federal student loans and fertility."
Based on what you have found, do you have any policy recommendations?
"Federal student loans may slightly depress fertility rates, but the effect is not that bad. I would not recommend stopping federal student loans. There are positive welfare effects from increases in income due to subsidized loans for higher education. It may be interesting to think of offering grants for higher education instead of loans."
