Academy of Financial Services Annual Meeting 2022

student loans, consumption adjustment,

We explore the following questions: (1) when does taking student loans constitute a “good” (value creating) decision and (2) what specific decisions with respect to higher education-related borrowing result in a satisfactory outcome. We find that two determinants primarily drive the ex post perception toward student loans: (1) the choice of the field of study and (2) the change in personal consumption upon graduation.

We find that students are indeed rational, and they make the student loan decision in conjunction with their salary decision. This is consistent with rational expectations and human capital theory.  We also find that there is a strong association between the perception that a major was worth it and the starting pay after graduation.

We also conclude that the major selection has an indirect impact on consumption adjustment post-graduation and in turn, an increase in consumption is associated with a positive view of the chosen major.