Student loan debt has an influence over borrowers’ career choices long after graduation, affecting their job satisfaction, career advancement, and investment strategies.
According to a recent study conducted by MissionSquare Research Institute, the debt that’s carried by one in four Americans under 40 affects job-acceptance decisions for 56% of public-sector employees and 62% of those working in the private sector.
“When they choose to accept . . . jobs, [the]majority of them have considered how that position or that job can help them with their student loan debt,” says the report’s author and MissionSquare’s head of research, Zhikun Liu. “It not only impacts people’s day-to-day financials, but also their morale at work, job acceptance, as well as their retention.”
While most professionals take salary into consideration, Liu says borrowers are more likely to view compensation as a top priority, even at the expense of other factors like job satisfaction or advancement opportunities. That was especially true among male, Black, and Hispanic borrowers, according to the survey, who were about 10% more likely to view the debt as a significant factor in their career choices.
Student loan debt has a negative impact on short-term labor market outcomes
Student loans burden many young workers with debt at a time when their lifetime earnings are at their lowest—early in their careers—and they have the least capacity to pay them off. Student debt is likely to elevate interest rates on other debts, which consequently raises the cost of consumption for borrowers. This financial constraint can drive young workers to modify their labor market preferences, making decisions that may acutely impact their careers in the long term.
Studies consistently show that student debt can sway decisions about pursuing further education. Several analyses have shown that students burdened with high levels of debt often postpone or opt out of enrolling in graduate or professional school: 20 percent of graduates with more than $20,000 in student loans report that their debt discouraged them from pursuing an advanced degree.
This effect can also extend to early career decisions. Graduates with debt are more likely to take substantially higher-paying positions and are less likely to choose lower-paying public interest roles. This influence on job choice skews a valuable portion of the labor force away from roles that are critical to our society.
Student loan discharge positively affects borrowers’ labor market outcomes. After discharge, borrowers experience heightened geographical mobility, job changes, and a subsequent income rise of approximately $3,000 over three years. This underscores how student loan debt constrains borrowers’ capacity to improve their labor market outcomes, highlighting the potential of debt relief to catalyze economic mobility.
Student loan debt is a significant barrier to economic mobility
Student loan debt is associated with lower levels of wealth building and limited upward mobility. Young households without student debt exhibit substantially higher net worth than those with debt. This imbalance is even greater for some demographic groups: Black and Latinx households with outstanding debt experience significant disparities in net worth compared to white households at similar income levels.
A substantial number of workers with relatively low student loan balances grapple with repayment challenges due to low-income work. As of 2019, 2.5 million young households bear a student debt-to-income ratio surpassing 0.5, with an average ratio of 1.03 for those in the bottom 50 percent of earners. Debt holders with annual income less than $33,769 had average student loan debt of $32,518 in 2022. Given these realities, it is not surprising that student loan holders are more prone to financial distress. Households with student loan debt have a higher likelihood of facing financial hardship, including late payments, credit denial, and foreclosure, especially if they did not complete a degree. Income growth for these families is minimal, while degree completers experience an increase of nearly $11,000 over two years.
Student loans, while crucial for social mobility among the younger generation, carry a lasting economic burden that distinguishes them from other debt types. This impact is attributed to its ineligibility for bankruptcy discharge, making it particularly enduring and impactful on credit and financial health. Loan forgiveness is found to alleviate some of this financial burden: student loan discharge leads to an 11 percent reduction in indebtedness and a 24 percent decrease in delinquent accounts for borrowers, with credit card and mortgage balances significantly reduced.
Intergenerational wealth gaps for Black and Latinx workers result in racially disparate debt burdens from student loans
In recent decades, there has been a growing influx of first-generation and low-income college students—often Black and Latinx students—who lack the resources and generational wealth needed to support their education expenses or repay their debts. The challenge of financing education may contribute to higher college dropout rates for students of color, resulting in elevated levels of financial distress for borrowers. Moreover, Black graduates experience a lower pay premium than their white counterparts upon completing their degrees.
The risks associated with student loan debt are greatest for those who do not complete their degree, which leaves borrowers strapped with student debt without the pay increase associated with a higher education credential. These borrowers are more likely to default on their loans and over time face demands for more education to secure the same jobs. As of 2019, Black individuals over the age of 25 are more likely to fall into this category of some college with no degree (39.4 percent) than their white and Latinx counterparts (37.9 percent and 36.2 percent, respectively), which further exacerbates the racial student debt gap for Black borrowers.
Among all working age adults, however, this subset of degree seekers saw racially disparate wages. Black workers with some college experience but no degree had a median hourly wage of $17.80 (in 2022 dollars), compared to Latinx workers at $18.58 and white workers at $21.06 with the same educational attainment. Even with a college degree, Black workers tend to make less than equally educated white workers, with median hourly wages of $26.80 and $32.51, respectively. (Clemens, Vaghul, Schmitt, & McGrew 2019)