Student Debt and Aggregate Consumption: Does Inequality Matter?

ABSTRACT This paper examines the role of income inequality in amplifying the macroeconomic effects of student debt. I argue that inequality captures structural differences in households' access to non‐student credit, with higher inequality reflecting a greater concentration of credit‐constrained households and thereby amplifying the adverse effects of student debt repayment on consumption. Using state‐level data, I show that the negative association between student debt and subsequent aggregate consumption growth is significantly stronger in states with higher inequality. Consistent with this mechanism, several stylized facts indicate that higher inequality is associated with lower levels of non‐student debt. Finally, I develop a simple model illustrating how income inequality increases the prevalence of borrowing constraints, thereby amplifying the sensitivity of consumption to debt repayment.