Educational debt burden and career choice: evidence from a financial aid experiment at NYU law school.

Abstract: This paper explores how the timing of career-contingent financial aid influences its effectiveness in encouraging law students to enter public interest work, and hence the isolated effect of educational debt timing on career choice. I analyze quasi-experimental data from NYU Law School's Innovative Financial Aid Study, in which career-contingent financial aid packages with equivalent net values but varying debt structures were randomly assigned to applicants. My results indicate that debt timing matters: law school graduates who receive tuition waivers rather than ex-post loan assistance have a 37% higher rate of first job placement in public interest law and a 94% higher rate of clerkships. Furthermore, recipients of tuition waivers are more likely to enroll in law school conditional on being admitted. Using propensity score methods to correct for sample selection bias at the matriculation stage, I find that differences in first job placement according to debt timing persist after controlling for differential enrollment rates, implying an independent post-enrollment influence of debt timing on career decisions. I present a behavioral model that accounts for both of these stylized facts, in which the time-inconsistent influence of debt on career decisions results from debt aversion with changing reference points