Working Paper: NBER ID: w23284
Authors: Holger M. Mueller; Constantine Yannelis
Abstract: The collapse in home prices during the Great Recession triggered a sharp drop in consumer demand by households, leading to massive employment losses. This paper examines the implications of these labor market shocks for the dramatic rise in student loan defaults, which originated during this time period. Linking administrative student loan data at the individual borrower level to de-identified tax records and exploiting Zip code level variation in home price changes, we show that the drop in home prices during the Great Recession accounts for approximately 24 to 32 percent of the increase in student loan defaults. Consistent with a labor market channel, we find a strong relationship between home prices, employment losses, and student loan defaults at the individual borrower level, which is concentrated among low income jobs. Comparing the default responses of home owners and renters, we find no evidence of a direct liquidity effect of home prices on student loan defaults. Lastly, we show that the Income Based Repayment (IBR) program introduced by the federal government in the wake of the Great Recession reduced both student loan defaults and their sensitivity to home price fluctuations, thus providing student loan borrowers with valuable insurance against adverse income shocks.
Keywords: Student Loans; Labor Market Shocks; Default; Income Based Repayment; Great Recession
JEL Codes: H81; I22; I26; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Home price declines (R31) | Student loan defaults (H74) |
| 1% decline in home prices (R31) | 0.00113 percentage point increase in defaults (E43) |
| Employment losses (J63) | Student loan defaults (H74) |
| IBR program introduction (Y20) | Reduced student loan defaults sensitivity to home price fluctuations (G51) |