Student loans and the labor market: Evidence from merit aid programs

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Stephanie Chapman, Ph.D. candidate, Department of Economics, Northwestern University


Student loans are a growing part of the college funding equation in the US, while merit aid scholarship programs have become a popular avenue for states to subsidize higher education. I use merit aid program eligibility in the thirteen states that have sharp test score cuto ffs for eligibility to evaluate the e ffects of college funding on the early labor market outcomes of college graduates. I examine the heterogeneity of the e ffects with respect to both ability and family income. I demonstrate that qualifying for a merit aid program lowers the loan burden of students by $7200, and has little impact on other outcomes while in school. However, employed students who qualify for merit aid programs have $6400 lower annual income one year after graduation, and a di fferent occupational pro file four years after graduation than those who just missed qualifying for the programs. Because merit aid eligibility changes little of the college experience other than the funding package, it functions as an instrument for loans. This implies that exogenously increasing the loan burden of a college graduate by $1000 increases her annual income by $600-$800 one year after graduation. Examining the heterogeneity of these results by both ability and family income suggests that these e ffects stem from credit constraints when individuals leave school. Together these results demonstrate that while merit aid scholarships may provide students with more flexibility to seek out jobs with non-pecuniary rewards, there is no detrimental financial impact of instead financing college with loans.

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