Credit Constraints and College Major Choice

Abstract

This paper connects the literature on the impact of credit constraints on labor decisions with that on the effect of student loans on student outcomes by considering a model in which taking student loans directly tightens a student’s working period borrowing constraint, resulting in more constrained behavior, and adapting it into an empirical strategy. The paper presents three key findings. First, analysis on the Post-Secondary Employment Outcomes database demonstrates that there are in fact majors which sit at opposite ends of the high initial earnings but low future earnings tradeoff or low initial earnings and high future earnings, such as Multidisciplinary Studies for the former and Biology for the latter. Second, using IPEDS data from 2015-2019 and Title IV loan data from 2011-2015, I show that, in line with the model, as the proportion of loan-takers doubles, the elasticity of major share with respect to initial earnings increases by 1.4-2.1 units, while the elasticity with respect to the present discounted value of total earnings decreases by 1.5-2.4 units. Third, I find evidence that Parent PLUS loans have the opposite direction of effect as other Title IV programs using a quasi-experimental continuous difference-in-differences design based on the 2011 PLUS program credit tightening. Estimates are directionally consistent with that of the first empirical model, suggesting that parent-borne loans affect the tradeoff differently. In all, the results suggest that degree of credit constraint is internalized for students’ career and allocation decisions even before formally entering the labor market.