Go big or buy a home: The impact of student debt on career and housing choices
What this paper finds — and why it matters
Layer 1: Overview
Research question and motivation: Folch and Mazzone ask how undergraduate student debt shapes three intertwined post-college decisions — whether to pursue a post-bachelor (graduate) degree, the trajectory of earnings, and whether/when to buy a home. The motivation is the steep rise in student borrowing: between 1993 and 2016 the share of undergraduates who ever borrowed rose from 45% to 68%, and median cumulative borrowing rose from $14,329 to $29,115 (2020 dollars). The puzzle the paper resolves is why debt strongly distorts education and earnings yet has a negligible net effect on home ownership timing.
Data and empirical strategy: The authors use restricted-use Baccalaureate and Beyond Longitudinal Study (B&B) data, focusing on the B&B:08/18 cohort (followed up to ten years post-graduation), merged with college-level IPEDS/College Scorecard data. The sample is restricted to US citizens/residents who earned a bachelor’s at ages 21-25, first enrolled 2001-2004, did not transfer, and excludes private for-profit colleges (~9,000 graduates in B&B:08/18; ~8,000 in B&B:16/17). In 2008, 72% of graduates held debt averaging $23,640; in 2016, 66% averaging $28,843. To address endogeneity of debt, they instrument with the change during enrollment in an institution-level grant-to-aid ratio (institutional grants / (grants + loans)), exploiting supply-side shifts in grants unlikely to be anticipated at application. The first stage is strong: one SD increase in grant-to-aid while enrolled predicts an ~18% decline in debt (about $4,250 lower balances), with F-statistics around 22-29.
Main quantitative findings: Increasing debt balances by 10% ($2,364 relative to average $23,640) reduces the probability of obtaining a post-bachelor degree by about 1 percentage point (from a baseline of 22% four years after graduation and 45% ten years after). The same 10% increase raises initial post-graduation earnings — about +3.6% four years out ($1,440) and +$1,392 one year out — but reverses to a 5.3% decline ($2,828) ten years out. Graduate-school enrollment falls by about 0.85% (1 year) and 0.83% (4 years) per 10% debt increase. The net effect on first-time home ownership timing is statistically insignificant.
Mechanisms: A life-cycle Roy model (Borjas 1987) with Ben-Porath (1967) human capital accumulation, housing, and financial frictions rationalizes this. Debt affects home ownership through two offsetting channels: (1) a traditional wealth effect that deters ownership, and (2) discouragement of further education that pushes graduates into early labor-market entry, accelerating ownership for that subgroup; these roughly cancel. Education choices are especially wealth-sensitive because post-bachelor attendance carries large non-monetary (amenity) returns valued at $3,929 on average (vs. $1,155 housing amenity), while the medium-run graduate wage premium is roughly 30% controlling for ability and human capital.
Policy implications: Traditional mortgage-style fixed repayment imposes high burdens right after graduation, distorting human capital investment. Income-based repayment (modeled on PAYE, 10% of discretionary income, 20-year term with forgiveness) raises post-bachelor enrollment (from 35% to 42.4%) and home ownership, but adversely sorts lower-ability workers into graduate school via the implicit subsidy and dampens human capital investment through a Ben-Porath labor-supply/tax channel. The assessment is partial equilibrium.
Layer 2: Deep Dive
What is the identification strategy and the main threats to it?
OLS of outcomes on log cumulative undergraduate debt is biased because unobservables (ability, true family contribution) drive both debt and outcomes. The authors instrument debt with the change during enrollment in an institution-level grant-to-aid ratio = institutional grants/(grants+loans). They use the CHANGE rather than the level (Eq. 2) because students may sort into colleges on the level of grants; mid-enrollment changes are unlikely anticipated. The exclusion concern is that grant-to-aid correlates with unobserved student characteristics affecting outcomes. They address relevance (first-stage F ~22-29; one SD raises grant-to-aid predicts ~18%/$4,250 lower debt) and conduct a balancing test (Table A.2) regressing the instrument on predetermined attributes — only financial need is significant (at 5%), and an F-test fails to reject joint insignificance. A residual threat is that idiosyncratic grant fluctuations could contract graduate slots at the same institution (supply-side); only 3.9% pursue graduate study at their undergrad institution, and splitting by Carnegie research vs. non-research institutions (Table A.8) leaves results intact. Another threat — relocation driving the housing/grad-school substitution — is addressed by re-estimating on 2009 and 2018 (years with state of residence): non-movers are 79% and 64%, and results closely mirror the full sample (Table A.7).
What are the two channels through which debt affects home ownership, and how are they distinguished?
Channel 1 is the traditional wealth effect: debt reduces wealth available for a downpayment, deterring ownership. Channel 2 is an indirect education channel: debt discourages graduate enrollment, pushing graduates into earlier labor-market entry where higher savings and lower balances facilitate earlier purchase, raising ownership for that subgroup. The two nearly cancel, yielding a negligible net effect. Empirically they are distinguished via ability sub-populations (Table 5): the housing response is negative for low-ability students but positive for high-ability students, and high-ability students cut enrollment more in response to debt. The structural model confirms it: for graduates who will not attend graduate school (Table A.10 Panel A), housing responds positively to debt; the substitution is also visible in life-cycle profiles where indebted bachelor holders have higher early ownership that reverses by age 30.
What heterogeneity is documented?
Ability heterogeneity is central. Two proxies are used: high-school grades, and time-to-degree (graduating within four years = high ability, five-plus years = low ability, following Hendricks and Leukhina 2018). High-ability graduates respond more in enrollment to debt; the housing response is positive for high-ability and negative for low-ability graduates (Table 5). In the model, the non-monetary value of graduate school is highly heterogeneous across the income distribution: poorer workers weigh almost only monetary returns, while high-income graduates value graduate school at the equivalent of hundreds of thousands of dollars in lifetime income, and debt shifts this distribution sharply leftward, especially for less wealthy individuals (Fig. 4).
What robustness checks are run?
Restricting the instrument sample to institutions with at least 6 observed graduates (preferred spec, dropping 5-10% of obs; robust to alternative cutoffs); a balancing test (Table A.2); relocation/non-mover re-estimation for 2009/2018 (Table A.7); splitting by Carnegie research vs. non-research institutions (Table A.8); testing completion conditional on enrollment (no detectable effect, Table A.6); home value conditional on ownership (insignificant, Table A.9); a binary ’ever borrowed’ instrument specification implying smaller income effects (Table A.1); varying max sample age to 23 or 30 (similar results); age-dependent unemployment risk calibration leaving results unaffected; and a gradual house-price-trend exercise (1.4%/yr for 12 years, Table A.17) confirming the baseline.
How does this relate to and differ from prior work?
On earnings, the paper aligns with Rothstein and Rouse (2011), Luo and Mongey (2019), Field (2009), and Alon et al. (2023) showing debt raises initial earnings (their ~$500 per $1,000 is larger than Rothstein-Rouse’s ~$200, Luo-Mongey’s $70-160, and Alon et al.’s ~$210 — attributed to their Great Recession entry cohort and pre-ICL period); the ten-year reversal of ~$1,200 per $1,000 is close to Alon et al.’s ~$1,270. On graduate school, it complements Zhang (2013) and Chakrabarti et al. (2023); they find a $10,000 debt increase reduces probability of a post-graduate degree by 3.4%. On home ownership, it contrasts with Mezza et al. (2020), who find ~1pp reduction per $1,000; the null is attributed to sampling — excluding for-profit and two-year programs and dropouts (over one-fourth of US graduates) selects higher-ability, lower-debt individuals for whom the education-substitution channel offsets the wealth channel. The structural contribution extends the initial-conditions/lifetime-inequality literature (Huggett et al. 2011; Griffy 2021) by modeling multiple wealth dimensions and graduate-education choice.
What does the structural model add and how well does it fit?
The model lets the authors control for ability explicitly and run the ‘ideal’ regression on simulated data (Table 9): indebted graduates have 0.22% higher earnings per 1% additional borrowing one year out but 0.11% lower ten years out, qualitatively replicating data point estimates within/near the 95% CIs. It fits earnings profiles, enrollment (slightly over a third pursue further education), and home ownership (reaching ~85% by age 50 in model and data). The model attributes excess sensitivity of education to wealth to the amenity value of graduate school operating as a luxury good (parameter xi). Quantitatively, discrete-choice effects are somewhat stronger than data, partly because only one graduate-school type exists and bequests/inter-vivo transfers are omitted, steepening the home-ownership profile.
What are the IBR policy results and their scope conditions?
Under universal PAYE-style income-based repayment (tau=10% of discretionary income above a threshold, capped at the 10-year Stafford payment, 20-year term with forgiveness), post-bachelor enrollment rises from 35% to 42.4% and home ownership grows (50-plus ownership up >13%), but total retirement wealth rises only ~3% — the ownership gain is mostly a shift from liquid to housing wealth driven by reduced precautionary saving. Enrollment among non-indebted graduates falls from above 60% to ~40% (because the implicit subsidy is decreasing in income), while the most-indebted tercile’s enrollment jumps from ~3.5% to ~42%. IBR adversely sorts lower-ability workers into graduate school and dampens human capital investment via a Ben-Porath/proportional-tax channel (consistent with de Silva 2025, Fu et al. 2025). Fiscally, ~4% of individuals (6% of borrowers) get forgiveness averaging $55,000 ($42,000 net of 24% tax), about $1,700 averaged across the cohort, or ~$20 per half-year period — small enough that behavioral feedback is negligible. SCOPE: the assessment is partial equilibrium, abstracting from general-equilibrium wage, return-to-education, and aggregate-demand adjustments.
Why does the earnings effect reverse sign over time?
Higher debt (lower net wealth) shifts the trade-off between current and future income: indebted graduates front-load earnings — choosing higher-paying occupations or careers rather than working more hours (labor-supply evidence is weak, Table A.5) — to ease debt payments on current consumption. The ‘smoking gun’ for the later decline is that debt reduces graduate-school enrollment both short- and long-run, forgoing the ~30% graduate wage premium and reduced human-capital accumulation; the model adds that early career sorting is hard to reverse because re-enrolling entails partial loss of accumulated human capital.