“Student loans give low-income families access to higher education,” says Minki Kim from the EPoS Economic Research Center. “Yet, we find that graduates with debt often do not reap the full rewards of their college degree. As they want to pay back the loan quickly, these young professionals tend to choose first jobs that are not optimally matched with their skills but offer higher initial earnings. This is not just a temporary problem because the large majority does not switch to better-suited jobs later on. So these professionals keep missing out a significant part of what they could potentially earn.” To quantify the earnings lost, the researchers computed the effects of debt forgiveness programs, as they help professionals to move on to better-paid positions.
Quantification of missed earnings opportunity
According to the computational model, lifetime earnings would increase by 36 percent if the full student debt was forgiven and, as a result, graduates changed jobs. Even forgiving just 10,000 USD would lead to an overall increase in earnings of 24 percent, if job switchers chose occupations better suited to their skills.
Debt forgiveness leads to large productivity gains
The misallocation of skills not only affects lifetime earnings of individuals, but overall economic productivity as well. According to the study, debt forgiveness leads to productivity gains by allowing workers to move on to occupations that better match their skills and offer higher productivity growth potential. For example, productivity gains amount to 4 percent for the occupational group “mathematical and computer scientists”. Overall, the results show higher productivity for each occupation group, therefore the entire economy, the researchers conclude.
Relevance for other types of debt
“Our results emphasize that getting into debt early in adulthood has a strong negative effect on individual earnings and overall productivity as workers trade off higher initial earnings for salary growth prospects,” says Kim. “Debt relief programs are important because they help workers to move on to better-suited positions. We believe that these results are not only relevant for student loans in the US, but also for other types of debt and other countries. Policymakers should take these findings into account when deciding on education subsidies, debt relief and career advice programs in the future.”