Job Search under Debt: Aggregate Implications of Student Loans

Abstract

This paper evaluates the implication of student loan debt on labor market outcomes. I begin by developing a tractable theoretical framework to analytically demonstrate that individuals under the burden of debt tend to search less and end up with lower-paid jobs. I then develop and estimate a quantitative search model with risk-averse agents, on-the-job search, and vacancy creation using NLSY97 data to evaluate the proposed mechanism. My model suggests that, under the standard fixed repayment plan, borrowers’ consumption is reduced due to debt repayment and lower wage income. The latter indirect effect caused by inadequate job search is potentially larger and more persistent than the direct effect from debt repayment. The income-based repayment plan (IBR) alleviates this distortion; I analytically elucidate the channels and quantitatively evaluate the aggregate and distributional effects of IBR. The model implies that poorer and more indebted borrowers would benefit more from switching to IBR. On average, IBR alleviates the debt burden by about half, among which one-third is attributed to better job matches.