Aversion to Student Debt? Evidence From Low-Wage Workers
85 Pages Posted: 12 May 2021 Last revised: 24 May 2021
Date Written: May 11, 2021
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: Suggested Citation