Socioeconomic Inequities in the Impact of Debt on Young Adult Financial Wellbeing

Background:  The purpose of this study is to examine the impact of debt on the SFWB of young adults, conditional on family background socioeconomic factors. Young adults’ perception of their financial wellbeing is important because it influences their decision-making around financial and other life-course milestones and their overall sense of wellbeing (Netemeyer et al., 2018). Debt is also known to have positive or negative impacts on subjective wellbeing (Brown et al., 2005). Access to financial resources in childhood and adolescence may shape both SFWB and the impact of debt on SFWB throughout the college years and into the early career period (Serido et al., 2010).

Methods:  Data were drawn from a longitudinal study examining financial knowledge, attitudes, and behaviours of emerging adults across four waves between 2008 and 2016. The sample included students enrolled at a major land-grant university at wave 1 (N=2,098). SFWB was measured using a three-item scale. Key explanatory variable were outstanding student debt and measures of family background socioeconomic status (perceived financial situation in childhood [PFSC], and parental income and education). Covariates included demographic and young adulthood socioeconomic, life course and psychological variables. We ran separate sequential OLS models and observed changes in the coefficient for debt with the addition of blocks of covariates. Year of data collection was included as a fixed effect to control for unobserved political-economic conditions. We then modelled interactions of debt with the family background socioeconomic status variables.

Results: Student debt was negatively associated with SFWB across all models (final model, b= -0.128 [p<0.001]). Family background socioeconomic status variables were significantly associated with SFWB, and their addition reduced the coefficient for debt (b  = -0.232 to [p<0.001] to b  = -0.178 to [p<0.001]), suggesting a strong impact of these factors on the relationship between debt and SFWB. The interaction between debt and PFSC was significant. Specifically, those with higher PFSC experienced a stronger negative association between student debt and SFWB relative to the low PFSC group (b = -.018, [p<0.05]).  However, young adults with low PFSC had consistently lower SFWB across debt levels, relative to their more advantaged peers (e.g. b = 9.21 for low PFSC, low debt and b = 8.5 for low PFSC, high debt, versus b = 10.06 for high PFSC, low debt; b = 8.98 for high PFSC, high debt).

Implications: Carrying outstanding student debt has a significant negative impact on the SFWB of young adults, and family background socioeconomic status moderates this effect. The negative impact of student debt is strongest among young adults from socioeconomically disadvantaged backgrounds. Further, student debt appears to be related to a convergence of SFWB across socioeconomic groups at higher levels of debt. These findings justify the need for policy makers, financial institutions and universities to address outcomes associated with rising student debt. Interventions such as expanding access to non-repayable grants for socioeconomically disadvantaged students, facilitating use of more flexible repayment schemes and offering financial counselling on campus and in the workplace may offset some of the negative impacts of debt.