Aversion to Student Debt? Evidence From Low-Wage Workers

85 Pages Posted: 12 May 2021 Last revised: 24 May 2021

See all articles by Radhakrishnan Gopalan

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School

Barton H. Hamilton

Washington University, Saint Louis - John M. Olin School of Business

Jorge Sabat

Universidad Diego Portales

David Sovich

University of Kentucky - Gatton College of Business and Economics

Date Written: May 11, 2021

Abstract

We use payroll and consumer credit data to estimate the effect of the minimum wage on the debts of low-wage workers. In the three years following a $0.88 increase in the minimum wage, the average low-wage worker experiences a $2,712 increase in income and a $856 decrease in debt. The entire decline in debt comes from a reduction in student loan borrowing among enrolled college students. Former students and non-students, in contrast, borrow more in response to an increase in the minimum wage. Future credit constraints, changes in labor supply, buffer-stock behavior, and several other channels do not explain the reduction in student loan debt. Two consumption-savings models -- one with student debt aversion and the other with a high perceived student loan interest rate -- best match our empirical findings.

Keywords: Student debt, minimum wage, debt aversion

JEL Classification: J01, J23, J38, H11

Suggested Citation

Gopalan, Radhakrishnan and Hamilton, Barton H. and Sabat, Jorge and Sovich, David, Aversion to Student Debt? Evidence From Low-Wage Workers (May 11, 2021). Available at SSRN: https://ssrn.com/abstract=3843961 or http://dx.doi.org/10.2139/ssrn.3843961

Radhakrishnan Gopalan (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Barton H. Hamilton

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive, Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-8057 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/hamiltonb/

Jorge Sabat

Universidad Diego Portales ( email )

Av. Santa Clara 797
Santiago, Región Metropolitana
Chile

HOME PAGE: http://https://sites.google.com/site/jorgesabat/home

David Sovich

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States

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