Aversion to Student Debt? Evidence from Low‐Wage Workers

Radhakrishnan Gopalan, Barton H. Hamilton, Jorge Sabat and David Sovich

Journal of Finance, 2024, vol. 79, issue 2, 1249-1295

Abstract: We combine state minimum wage changes with individual‐level income and credit data to estimate the effect of wage gains on the debt of low‐wage workers. In the three years following a $0.88 minimum wage increase, low‐wage workers experience a $2,712 income increase and a $856 decrease in debt. The entire decline in debt comes from less student loan borrowing among enrolled college students. Credit constraints, buffer‐stock behavior, and other rational channels cannot explain the reduction in student debt. Our results are consistent with students perceiving a utility cost of borrowing student debt arising from mental accounting.

Date: 2024
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