Student loan debt is not only crippling Americans financially, it is holding them back from pursuing better opportunities.

When student debt is erased, a huge burden is lifted and people take big steps to improve their lives: They seek higher-paying careers in new states, improve their education, get their other finances in order, and make more substantial contributions to the economy, according to a new research study Second Chance: Life without Student Debt.

The study was co-written by Harvard Business School Associate Professor Marco Di Maggio, Indiana University Assistant Professor Ankit Kalda, and Vincent W. Yao of Georgia State University.

The paper shines a light on a student debt crisis that Democratic presidential hopefuls have called a national emergency. Sen. Elizabeth Warren has proposed forgiving student loan debt for millions of borrowers on a sliding scale based on income, and Sen. Bernie Sanders has pushed for eliminating undergraduate tuition and fees at public colleges and universities.

Di Maggio is careful to note that his team did not study the costs of any debt-relief proposal. But it’s clear from the research results that student debt is acting as a strong drag on people’s finances, and several benefits would come from liberating people from these loans, he says.

“People with a lot of student debt are more fragile and they postpone other life choices, like moving, buying a house, or getting married,” Di Maggio says. When that debt is gone, people feel more freedom to make a change with their careers and get their acts together financially.

“We do see a risk-taking angle to this, where people are willing to pursue a higher-paying job that might or might not pay off,” he says. “They have the liberty of trying because they don’t have these debts hanging over them. Helping people out with their loans allows them to make better decisions.”

More borrowers are defaulting on student loans

Billionaire tech investor Robert F. Smith pledged this week to donate about $40 million to pay off the student loan debt of Morehouse College’s graduating class, a generous move that highlights the growing burden on borrowers.

In the past decade, student debt in the United States has ballooned, reaching $1.5 trillion in the first quarter of 2018. About 44 million graduates shoulder more than $30,000 in student loans. In fact, student debt is the second largest consumer debt in the US, trailing only mortgage loans—and surpassing car loans, credit card debt, and home equity lines of credit.





Many people who currently carry student debt are having trouble keeping up with their monthly payments. The number of delinquent loans has increased in the last 10 years; today, about 11 percent of borrowers have been delinquent on student loans for 90 days or more.





The researchers studied thousands of borrowers who had defaulted on their student loans and separated them into two groups—one that had their student loans forgiven and another that still carried debt—and found significant benefits for those whose student loans were wiped out:

They pursued higher-paying jobs. When borrowers were relieved of student loans, they had more freedom to pursue new opportunities. They were 4 percent more likely to move to a different state and also more likely to improve their education. Plus they were 30 percent more likely to change jobs—and the people who did make a switch were significantly more likely to land higher-paying jobs in new industries. These changes amounted to a $4,000 boost to their income, roughly equivalent to two months’ salary. Di Maggio notes that many employers do credit checks, so when borrowers are in default, they may have more trouble getting jobs. “Once that loan gets discharged, you’re much more competitive on the market,” he says.



Plus, worries about the future may hold people back from pursuing better work: Although delinquent borrowers are paying nothing on their loans in the moment, they may have concerns that sooner or later collectors will catch up to them and garnish their wages, so they may not be keen on looking for higher-paying work just to pay collectors more. If their loans are discharged, however, they may feel more motivated to pursue new jobs, knowing that any additional dollar earned will go right into their pockets.

When borrowers were relieved of student loans, they had more freedom to pursue new opportunities. They were 4 percent more likely to move to a different state and also more likely to improve their education. Plus they were 30 percent more likely to change jobs—and the people who did make a switch were significantly more likely to land higher-paying jobs in new industries. These changes amounted to a $4,000 boost to their income, roughly equivalent to two months’ salary. Di Maggio notes that many employers do credit checks, so when borrowers are in default, they may have more trouble getting jobs. “Once that loan gets discharged, you’re much more competitive on the market,” he says. Plus, worries about the future may hold people back from pursuing better work: Although delinquent borrowers are paying nothing on their loans in the moment, they may have concerns that sooner or later collectors will catch up to them and garnish their wages, so they may not be keen on looking for higher-paying work just to pay collectors more. If their loans are discharged, however, they may feel more motivated to pursue new jobs, knowing that any additional dollar earned will go right into their pockets.

They chipped away more at other debts. Without student debt, people were better able to manage their finances. Borrowers whose loans were forgiven reduced their total debts by about $5,000, or 26 percent, which was partly due to people increasing repayment amounts on credit cards, as well as auto and mortgage loans, by shelling out more than the minimum amounts due. People unburdened by student loans also carried fewer credit card accounts, and they had fewer credit inquiries, which shows a lower demand for credit in general.

Without student debt, people were better able to manage their finances. Borrowers whose loans were forgiven reduced their total debts by about $5,000, or 26 percent, which was partly due to people increasing repayment amounts on credit cards, as well as auto and mortgage loans, by shelling out more than the minimum amounts due. People unburdened by student loans also carried fewer credit card accounts, and they had fewer credit inquiries, which shows a lower demand for credit in general.

They were less likely to default on other loans. Compared to people whose student debt remained a burden, those with no student loans pulled themselves together financially. They were 12 percent less likely to default on other accounts, particularly credit cards and mortgages. “We weren’t expecting these people to be in such better shape,” Di Maggio says. “They used credit in much more responsible ways. There might also be a psychological factor at play, where borrowers were thinking they didn’t want to end up in collection again.”

Compared to people whose student debt remained a burden, those with no student loans pulled themselves together financially. They were 12 percent less likely to default on other accounts, particularly credit cards and mortgages. “We weren’t expecting these people to be in such better shape,” Di Maggio says. “They used credit in much more responsible ways. There might also be a psychological factor at play, where borrowers were thinking they didn’t want to end up in collection again.”

They increased their spending. Many people relieved of student debt increased their spending afterward. Borrowers that had been delinquent only on their student debts were significantly more likely to purchase cars, for instance.





All of these results show that policy interventions in the student loan market should not be considered a zero-sum game between lenders and borrowers alone, since there are broader effects on the economy, Di Maggio says.

“These people get better jobs and spend more money, and this money goes back into the economy,” he says. “Those things should be taken into account when evaluating policy interventions aimed at addressing the student loan problem.”





And it’s important to remember, Di Maggio says, that all of the borrowers in the study were in default and were already skipping payments on these loans, so erasing their student debt did not increase their cash flow.

“If people were paying $500 per month on student loans and then were suddenly paying nothing, then you’d expect these results,” he says. “But these borrowers were paying zero previously and they kept paying zero, so the only thing that disappeared was this $10,000 or $20,000 in student loans hanging over their heads. In light of that, we were surprised to see such a big effect.”

How scores of borrowers got out of debt

The researchers took advantage of a rare opportunity to get an inside look at the effects of student debt by studying a group of borrowers who were fortunate enough to see their own student loans cancelled.

National Collegiate, which holds 800,000 private student loans totaling $12 billion, had more than $5 billion of these loans in default as of 2018, according to the Consumer Financial Protection Bureau. In the past five years, the company has sued tens of thousands of borrowers who have fallen behind in an aggressive attempt to collect on the loans.

But the company had bought these loans from a series of banks and other financial institutions, and when the loans changed hands, critical paperwork was lost and National Collegiate couldn’t establish chain of title to prove that it owned the debt in the first place. So judges nationwide have tossed out these collection lawsuits and have canceled the debts of thousands of borrowers.

From these court battles, the researchers were able to identify borrowers, and the credit bureau Equifax anonymously matched these borrowers with other private information, including monthly payment histories on auto loans, mortgages, home equity lines of credit, student loans, and credit cards, plus occupation and income information.

Using debt relief to attract talent

Di Maggio says business leaders could find creative ways to use the research results to their advantage in attracting talent. For instance, companies competing for in-demand workers, such as tech firms, might consider offering job candidates help with paying off their student loans.

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“This would be a great way of attracting talent,” he says. “I think there are opportunities to find private solutions to this issue.”

Another important lesson for students, Di Maggio says: Be careful about which loans you take on.

Federal student loans are directly funded by the government and offer a variety of consumer protections to help those who are struggling, such as repayment options that fluctuate based on a borrower’s income and the ability to defer payments, sometimes without paying interest, if a job is lost. Private student loans often don’t offer these protections, and many people end up accumulating enough debt that their earnings, particularly in lower-paying jobs, can’t cover their repayments.

“It’s difficult for students and families to compare prices and provisions of different loans, and they can be duped into choosing the wrong ones,” Di Maggio says. “But if 10 years from now one of these kids gets an employment shock and loses a job and they want to file for bankruptcy, the student loans don’t go away. The choices people make with student loans are important because they have a deep and long-lasting effect.”

About the Author

Dina Gerdeman is senior writer at Harvard Business School Working Knowledge. Angela Sun, a Boston-based graphic designer, created the charts above.

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