Student Loans and the Labor Market: Evidence from Merit Aid Programs

Student loans are a growing part of the college funding equation in the US, while at the same time merit aid scholarship programs have become an increasingly popular avenue for states to subsidize higher education. To evaluate the effects of college funding on the early labor market outcomes of college graduates, I use merit aid program eligibility in thirteen states with sharp test score cutoffs. I demonstrate that the primary causal effect of qualifying for a merit aid program is to lower the loan burden of students by $6000-$8000. Eligibility has little impact on other outcomes while in school. However, students who qualify for merit aid programs have $4000-$6000 lower annual income one year after graduation, and a different occupational profile 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 $400$800 one year after graduation. Together these results imply 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 funding college with loans. In fact, graduates with loans may offset their loan balance entirely within 2-3 years of graduation through differential job selection. ∗Ph.D. candidate, Department of Economics, Northwestern University Address: 2001 Sheridan Road, Evanston, IL 60201 Email: [email protected]; I would like to thank Matthias Doepke, Jon Guryan, Lee Lockwood and Matt Notowidigdo for detailed comments and suggestions, and in particular Diane Whitmore Schazenbach for extensive comments, suggestions, and assistance in accessing the data for this project. In addition I gratefully acknowledge the support of the Washington Center for Equitable Growth, which provided funding for this project.