The Effects of Student Loans on Long-Term Household Financial Stability Dora Gicheva 1 Jeffrey Thompson 2 1 UNC Greensboro 2 Federal Reserve Board October 26, 2013 Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 1 / 26
Introduction Motivation Unintended consequences of student loan program that we should be aware of Need to take into account all costs for cost-benefit analysis Less is known about long-term consequences of holding student debt Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 2 / 26
Introduction Motivation Are growing debt burdens in the right tail of the distribution manageable? Should not ignore positive return to student borrowing What about borrowers who do not complete degree? Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 3 / 26
Introduction Research Questions How do student borrowers fare financially after graduation, compared to similar non-borrowers? Are borrowers who do not complete Bachelor s degree more likely to experience financial hardship? How can we address bias from omitted variables and simultaneity/reverse causality? Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 4 / 26
Introduction Empirical Approach Data from Survey of Consumer Finances Student loans that originated between 1970 and 2010 Observe outcomes in 1995-2010 Instrument for amount borrowed using variations in aggregate borrowing trends Exogenous policy-induced changes in eligibility and take-up Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 5 / 26
Introduction Overview of Findings Conditional on broad measures of educational attainment, student debt linked to credit constraints and bankruptcy $10,000 in student loans increases probability of being turned down by creditors by about 6 percentage points Home ownership rates may also be affected Relationship stronger for non-completers Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 6 / 26
Introduction Post-Graduation Outcomes Affected by Student Debt: Existing Evidence Graduate school attendance (mixed evidence) Career choice and starting salary Specialized studies: Physician specialty choice (limited impact) Law school graduates choice to enter public sector law Entry into marriage Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 7 / 26
Methodology Specification Empirical Model Want to estimate Omitted variable bias: E(Y ) = α(loans) + Xβ Student loans correlated with many unobservables that contribute to financial stability Type of education, academic success, family background,... Possible reverse causality Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 8 / 26
Methodology Specification Empirical Model Two-stage least squares approach First stage: E(Loans) = Xδ + γz The instrument Z equals average amount borrowed per full-time equivalent student (including non-borrowers) in constant dollars in year when respondent was 17 years old From Trends in Student Aid 2012 Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 9 / 26
Methodology Specification Aggregate Borrowing Trends Reauthorizations of the HEA of 1965 New types of aid Expand loan limits and eligibility Interest rate changes Private loan market Increasing gap between costs and grant aid Information availability Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 10 / 26
Methodology Specification Aggregate Borrowing Trends Federal/Private Loans per FTE Student $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Federal Loans per FTE Student Total (Federal+Private) Loans per FTE Student Year Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 11 / 26
Methodology Specification Aggregate Borrowing as Instrument Captures exogenous changes in eligibility and take-up rates Relationship between prevalent borrowing behavior in year of high school graduation and individual s borrowing decisions Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 12 / 26
Methodology SCF Data Survey of Consumer Finances Sample Six cross-sectional surveys conducted between 1995 and 2010 Full student borrowing histories Very detailed information about assets and liabilities Respondents born in 1954 or later - entered college after 1970 Age 29 or older N = 12, 037 Weights make sample nationally representative Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 13 / 26
Methodology SCF Data Student Loans in the SCF All debt accumulated by household members Exact amount and year of each education loan Adjusted for inflation Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 14 / 26
Methodology SCF Data Gicheva Borrowing and Thompson is in constant 2010 Student dollars. Loans and Financial Stability October 26, 2013 15 / 26 Student Loans in the SCF 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% $40.0 $35.0 $30.0 $25.0 $20.0 $15.0 $10.0 $5.0 0.0% 1995 1998 2001 2004 2007 2010 Share of PEU with any atudent loan debt Average borrowing ($1,000) among those with debt $0.0
Methodology SCF Data Outcomes of Interest Whether denied credit, granted less credit than applied for initially, or did not apply because feared rejection - previous 5 years At least one late payment of bills (60 days or more) - previous 5 years Payment to income ratio over 40% All loans Excluding education loans Excluding education loans and mortgage Whether filed for bankruptcy - previous 10 years Whether owns primary residence Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 16 / 26
Methodology SCF Data Summary Statistics, Outcome Variables (N = 12,037) 60.78% 36.76% 8.56% 11.40% 10.77% 2.15% 8.29% Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 17 / 26
Methodology SCF Data Summary Statistics, Explanatory Variables (N = 12,037) College degree 0.198 Masters degree 0.061 Doctorate 0.012 Female respondent 0.559 White 0.683 Black 0.141 Hispanic 0.111 Age 39.5 (7.2) Any college-age kids in PEU (18-24) 0.109 Disabled (either R or SP) 0.065 Normal income ($1,000) 86.7 (211.8) Predicted wage ($1,000) 51.6 (65.2) Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 18 / 26
Methodology SCF Data Aggregate and Derived Controls Annual average county-level unemployment rate from the BEA County per-capita personal income, relative to national average Predicted wage income Using occupation, demographics, full-time or part-time and self-employment status, years of education Current Population Survey data Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 19 / 26
Results Main Sample Results (Second Stage) Denied Credit 0.0063 *** Bankrupt 0.0068 *** Late Payments 0.0036 ** Home Owner -0.0018 Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 20 / 26
Results Main Sample Results (Second Stage) Denied Credit 0.0063 0.0068 *** *** Bankrupt 0.0068 0.0071 *** *** Late Payments 0.0036 0.0037 ** ** Home Owner -0.0018-0.0023 Education X Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 20 / 26
Results Main Sample Results (Second Stage) Denied Credit 0.0063 0.0068 0.0082 *** *** *** Bankrupt 0.0068 0.0071 0.0074 *** *** *** Late Payments 0.0036 0.0037 0.0041 ** ** *** Home Owner -0.0018-0.0023-0.0055 ** Education X X Disabled X College-age kids X Normal income X Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 20 / 26
Results Main Sample Results (Second Stage) Denied Credit 0.0063 0.0068 0.0082 0.0073 *** *** *** ** Bankrupt 0.0068 0.0071 0.0074 0.0079 *** *** *** *** Late Payments 0.0036 0.0037 0.0041 0.0027 ** ** *** Home Owner -0.0018-0.0023-0.0055-0.0035 ** Education X X X Disabled X X College-age kids X X Normal income X X County UR X County income X Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 20 / 26
Results Main Sample Results (Second Stage) Denied Credit 0.0063 0.0068 0.0082 0.0073 0.0060 *** *** *** ** ** Bankrupt 0.0068 0.0071 0.0074 0.0079 0.0072 *** *** *** *** ** Late Payments 0.0036 0.0037 0.0041 0.0027 0.0023 ** ** *** Home Owner -0.0018-0.0023-0.0055-0.0035-0.0021 ** Education X X X X Disabled X X X College-age kids X X X Normal income X X County UR X X County income X X Predicted wage X Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 20 / 26
Results Main Sample Results (First Stage) F statistic of excluded instrument 57.47 Average loans per FTE 0.00317*** Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 21 / 26
Results Main Sample Results (First Stage) F statistic of excluded instrument 57.47 Average loans per FTE 0.00317*** Female 0.381 College degree 3.601*** Masters degree 9.074*** Doctorate 16.15*** White 3.239** Black 4.280** Hispanic -0.121 Age -0.680** Age sq 0.00679* Any college-age kids 2.356*** Disabled -0.357 County relative per-capita income 1.560* County unemployment rate 0.350*** Predicted earnings 0.912*** Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 21 / 26
Only 2% of students Results who first Non-completers enrolled at a postsecondary institution than $50,000 by 2009. Over 40% did not borrow and another 25% borr Student Debt and College Completion FIGURE 11A Educational Attainment by 2009 of Students First Enrolling in 2003-04, by Total Amount Borrowed (and Overall Percentage of Students in Debt Category) FIGURE 11B Sector Last Attended Recipients Who First Borrowed (and Overa Attained Bachelor s Degree Attained Associate Degree Attained Certificate No Degree, Still Enrolled No Degree, Left Without Return Total 31% 9% 9% 15% 36% Total Cumulative Debt Level $75,001 or more (1%) $50,001 to $75,000 (1%) $30,001 to $50,000 (5%) $20,001 to $30,000 (8%) $10,001 to $20,000 (16%) $1 to $10,000 (25%) Did Not Borrow (43%) 15% 26% 42% 9% Source: Trends in Student Aid, 2012 58% 53% 9% 65% 17% 9% 85% 10% 1% 0% 5% 9% 15% 10% 1% 11% 15% 14% 2% 10% 16% 18% 3% 10% 7% 17% 24% 16% 14% 0% 20% 40% 60% 80% 100% Percentage NOTE: Percentages in the parentheses on the vertical axis correspond to percentage of all students with th 43% 43% Cumulative Debt Level $75,001 or More (2%) $50,001 to $75,000 (3%) $25,001 to $50,000 (16%) $1 to $25,000 (42%) Did Not Borrow (36%) Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 22 / 26 0%
Results Non-completers Results by College Completion Status 0.06 0.04 0.02 0.00-0.02 Denied Credit Bankrupt Late Payments Home Owner -0.04-0.06-0.08-0.10-0.12-0.14 R or SP attend, drop out R & SP attend, R and/or SP drop out R or SP attend, complete R & SP attend, complete Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 23 / 26
Discussion Summary of Findings Student debt likely associated with decreased financial stability Additional $10,000 in student loans predicts 6 percentage point increase in probability of being denied credit over 5 year period and 7 percentage point increase in probability of bankruptcy over 10 year period Borrowers more likely to be late on bill payments Home ownership rates may also be affected Debt management seems particularly hard for non-completers Many confounding factors make establishing causality hard Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 24 / 26
Discussion Why Does Student Debt Lead to Observed Financial Distress? Impact on disposable income, combined with liquidity constraints Debt-to-income ratio and mortgage availability Changing aggregate labor market conditions? If continued decline in the returns to postsecondary education combined with policy-induced increase in borrowing Unlikely - evidence of increasing high school-college wage differential Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 25 / 26
Discussion Why Does Student Debt Lead to Observed Financial Distress? High uncertainty in ex post return to a degree Cannot tell if borrowers are making optimal choices ex ante Particularly bad for non-completers Focus on expected return or better safety net? What is the correct counterfactual? Gicheva and Thompson Student Loans and Financial Stability October 26, 2013 26 / 26