Trouble at Home: Financial Constraints and Human Capital Formation

This paper tests whether family financial shocks affect human capital formation. We compare treated (control) college students enrolled in the same course contemporaneously at the same university, whose families reside in areas that experience (do not experience) climate events. Families in affected areas are more likely to become financially constrained. Afterward, treated students exhibit poorer academic performance, are less likely to enroll in STEM courses, are more likely to quit courses or drop out, and are more likely to default on student loans later in life. The effects are mostly driven by disruption to family financial resources rather than psychological stress. The effects are stronger for middle class students relying on family income to pay for college; poor students are immune from the financial disruption because they already rely heavily on external financing; high-income family students can navigate disasters with little impact because contributions to college attendance stem from wealth rather than income. Additionally, male and non-white students are more negatively affected by financial disruption. Our results suggest implications for families disrupted by the COVID-19 pandemic and, more broadly, suggest consequences for climate change to the extent it exacerbates weather volatility.