The Impact of Debt on Changes in the Subjective Financial Wellbeing of Young Adults

Background: The purpose of this study is to examine the impact of changes in debt on changes in subjective financial wellbeing (SFWB) among emerging adults. Research suggests that debt can have positive or negative impacts on subjective wellbeing (Brown et al., 2005), and the nature of this relationship may depend on type or amount of debt, as well as background and current financial, psychological and demographic factors (Drentea & Reynolds, 2015; Robb, 2017). Despite significant increase in the debt burdens of emerging adults over the past four decades (Houle, 2014), we know little about the nature of this relationship in emerging adulthood.

Methods:  Data were drawn from a longitudinal study examining financial knowledge, attitudes, and behaviours of emerging adults across four waves between years 2008 and 2016.  The sample included students enrolled at a major land-grant university at wave 1 (N=2,098).  The sample was narrowed to include participants who responded at all waves (n=662).  Just over half of the sample used student loans to finance post-secondary education, the majority held outstanding credit card or other debt in at least one wave, and just over one third had a mortgage in wave 4.

We employed a multilevel model for change (Singer and Willett, 2003) to simultaneously examine within- and between-person change over time. The dependent variable (SFWB) was measured using a three-item scale. Explanatory variables were dichotomous measures of debt type (student, credit, mortgage, other), and continuous measures of debt level (overall and by type). Covariates included invariant family background characteristics measured at wave 1 (parental income and education, family financial situation in childhood, ethnicity), as well as time varying psychological, financial, and demographic characteristics. 

Results: Unconditional mean and growth models showed statistically significant variation in SFWB within individuals over time, as well as significant variation in trajectories of SFWB across individuals.  Comparing SFWB trajectories of student debtors and non-debtors revealed that student-debtors had lower initial SFWB at Wave 1 (intercept = -0.41, p<0.01) and differed from non-debtors in their change trajectories across the four waves (slope = -0.1, p<0.05). In uncontrolled models, variance components were significant, indicating additional within- and between-person variation that may be explained by covariates. In the full paper, extended models explore effects of time-variant and -invariant covariates on the relationship between multiple debt types and SFWB.

Conclusions: Students are taking on increasing levels of debt to finance PSE. We find that debt has significant negative impacts on the SFWB trajectories of emerging adults. Those who use debt to finance their PSE are more likely to experience a significant drop in their SFWB in the transitional period from college to career, during which they are likely to have low income relative to life course earnings and face education debt repayment. Findings justify the need for governments and universities to consider the broad impact that student debt burden places on emerging adults. Applied interventions such as facilitating access to more flexible repayment schemes and financial counseling may offset some of the negative impacts of debt.