Associations Among Anxiety, Student Loan Repayment and Financial Knowledge

Background and Objectives: Anxiety is one of the most common types of mental health disorders, affecting one in five adults in the US. Evidence from literature suggests that onset of mental illness and specific mental health conditions leads to possible triggers of “problem debt” such as falling behind on debt obligations or defaults. Student loans have now become the second largest part of the total household debts in the US; however, about a quarter of borrowers cannot repay their loans on time. Literature on the impacts of anxiety on student loan repayment behaviors and financial knowledge is sparse. The primary objective of this study was to examine the effects of anxiety on student loan repayment behaviors. The secondary objective was to assess whether financial knowledge and financial behaviors affect student loan repayment behaviors.

Methods: The study used a subset of data from the 2018 National Financial Capacity Study (NFCS) and included only those respondents who had student loans (n=3,314). Multinomial logistic regression was performed to examine the effects of anxiety on student loan repayment behaviors (never late, late once, and late more than once) after controlling for financial knowledge, financial behaviors, and demographics. To gain further insights into financial capability of borrowers, chi-square tests were conducted on six financial knowledge questions and student loan repayment behaviors.

Results: Results of multinomial regression suggested that a unit increase in anxiety scores increased the odds of being late on repaying student loans by 1.2 (late once vs never late) to 1.3 times (late more than once vs never late). Increase in financial knowledge scores lowered the odds of being late on student loan repayment by 27.2% (late once vs on-time repayment) and 15.3% (late more than once vs never late). Better financial behaviors decreased the odds of being late on student loan repayment by 30% for respondents who were late once and 46% for more than once compared to respondents who repaid on time. Demographic differences indicated that being male, in higher age-group, non-White, married, unemployed, or low-income increased the likelihood of being late on student loan repayment. Results of chi-square tests on six financial knowledge questions and student loan repayment behaviors were significant and suggested three patterns: (a) most of the respondents correctly answered interest rates and mortgage questions, (b) respondents (especially those late more than once) performed poorly on bond prices and compounding questions, and (c) respondents who were late once were the worst performers on inflation, stock, interest, and mortgage questions.

Conclusions: Delinquency and defaults in student debts are now becoming major problems not only for millions of borrowers but also for lenders, school administrators, counsellors, and social workers. Findings suggest that worsening anxiety can amplify unhealthy financial behaviors such as falling behind on payments; creating a vicious cycle that is difficult to overcome in the future. This has implications particularly for socioeconomically vulnerable population groups as they have disproportionately high amounts of debts, lack access to mental health services, and face more repayment issues compared to other groups.