Student Loan Debt and Financial Insecurity Among Young Families

Background

Many American families experience financial insecurity, defined here as debts exceeding assets. Young adulthood (age 25-45) is an important stage in the life course when individuals form families and earnings increase (Settersten, et al, 2015). Yet, young adults are at elevated risk of financial insecurity. Since the early 2000s, the proportion of individuals carrying student loan debt has increased by 25% (Houle, 2014). The burdens of student debt unequally affect traditionally underrepresented groups in higher education (minorities and low-income students). Compared to the US, Canadian young adults take on less student loan debt. This study aims to understand how student loan debt shapes financial insecurity of young families. The research questions are: (a) how have student loan debt and financial insecurity changed over time? (b) how would changes in levels of student loan debt affect financial insecurity? and (c) to what extent does student loan debt explain cross-national differences in financial insecurity?

Methods

Data were drawn from the Luxembourg Wealth Study, a cross-national database that harmonizes representative household surveys of wealth across 15 countries. US data were from the Survey of Consumer Finances (1993 to 2013); Canadian data were from the Survey of Financial Security (2012). The sample was restricted to families with household head age 25-45. Financial insecurity was defined as total debts exceeding total assets. Student loan debt included self-reported balances for education loans. Covariates included age, family structure, education, employment, and family income. Probit regression models predicting financial insecurity were fit for each country, and a pooled sample of both countries. Regression-based decomposition methods (Oaxaca, 1973) were used to explain cross-national differences. Dollar values were adjusted to 2011 US dollars using the Consumer Price Index. Analyses used household probability weights.

Results

American families were more likely than Canadian families to be financially insecure and hold student debt: 24% experienced financial insecurity (13% Canada) and 35% had student debt (19% Canada). US student debt rates increased proportionally by 85% since 1995. Without student loan debt, financial insecurity in America would be halved (11%). In pooled regressions, Americans were more likely than Canadians to experience financial insecurity (b = .38, p < .001). Imposing the distribution of Canadian student loan debt to the US would reduce the prevalence of financial insecurity by over five percentage points (p < .01). Covariate characteristics did not explain the 11 percentage point difference in financial insecurity between countries. Rather, the coefficient for employment was the most influential predictor of cross-national differences.

Conclusion

About a quarter of American young families experience financial insecurity. In 2013, student loan debt accounted for half the prevalence of financial insecurity in the US. If higher education funding and loan policies could adjust student debt amounts and levels to those observed in Canada, financial insecurity would be cut by 20%. Such policy changes would likely generate spillover consequences for postsecondary enrollment and retainment. Additional research is needed to understand the impact of policies such as Income-Driven Repayment plans that attempt to adjust for labor market status.