The Role of Student Debt on Major Choice and Labor Market Outcomes

• In Event: Uncertainty in Higher Education: Admission, Aid, and Costs

Abstract

In the United States, fewer than two-thirds of students complete a college degree within six years, and failing to graduate can be costly: individuals with some college but no degree earn approximately 12 percent less annually than college graduates. While several studies show how grant aid affects college access and persistence, much less is known about how longer-term financial incentives shape students’ academic decisions, time-to-degree, and post-college outcomes. In particular, there is little causal evidence on the effects of conditional loan forgiveness programs designed to incentivize certain behaviors by converting a grant into a loan when students fail to meet specified conditions.

This paper examines the impacts of conditional loan forgiveness using the Texas B-On Time (BOT) Student Loan program. BOT loans were issued to eligible students between 2004 and 2019 with the understanding that BOT loans would be forgiven if students maintained a cumulative GPA of at least 3.0 and graduated within four or five years, depending on major-specific requirements. By tying forgiveness to both GPA thresholds and on-time graduation, the program created strong incentives that could influence students’ effort, course-taking behavior, major choice, and persistence decisions. Failing to meet BOT’s requirements may also leave students with more debt than they expected, potentially impacting students’ decisions during college and afterwards. With administrative education and earnings data from Texas, we exploit multiple sources of plausibly exogenous variation to identify BOT’s causal effects on short-run outcomes, including major choice, credit accumulation, and time-to-degree, as well as long-run outcomes such as earnings five to ten years after college entry and graduate school enrollment. The sources of exogenous variation we exploit include GPA thresholds that determine eligibility for loan forgiveness, eligibility cutoffs for BOT participation, and staggered adoption of BOT across colleges in Texas. 

This paper provides new evidence on how conditional loan forgiveness programs shape student behavior and highlight potential unintended consequences, including distortions in academic choices or differential effects across student groups.

Author

• Annemarie Elizabeth Schweinert, University of Missouri-Columbia
  Presenting Author