Are Millennials Ruining Monetary Policy? Student Loan Debt and Monetary Policy Transmission

Abstract

Has the significant increase in fixed-rate, non-refinanceable student loan debt in the United States over the last 20 years affected the transmission of monetary policy to household consumption? Several studies have emphasized the importance of refinancing as a key mechanism through which households fund consumption in response to expansionary monetary policy. In this paper, I estimate consumption responses to expansionary monetary policy shocks for households with different types of debt to study the implications of the increased share of student loan debt in the household balance sheet. I find that households with fixed-rate non-refinanceable student loan debt have a muted consumption response compared to mortgagors and households with variable-rate student loan debt. Mortgagors and variable-rate student loan holders have significantly larger consumption responses, approximately $4000, or 40% more over four years. I then calculate the implied effect on average household consumption responses given the composition of the household balance sheet in 2007 versus 2019. I find that the reallocation of household debt has reduced average monetary policy responses by around 10% after two years.