Mental Bandwidth, Financial Anxiety, and Student Loan Repayment

Background and Objectives: While the fate of student loan waiver in the US is still unclear, the federal Covid-19 forbearances on student loan repayment is set to expire soon. Debt (including student debts) is not only a source of constant stressor but also consumes (or taxes) considerable mental bandwidths available to individuals. Evidence from literature suggests that thinking about finances creates a feeling of scarcity that not only saps people’s cognitive attention and affects the way people think and act, but can also trigger unhealthy financial behaviors such as falling behind on debt obligations, missing bill payments, or not saving adequately for meeting unexpected expenses. The current literature on the relationships between thinking about finances on student loan repayment behaviors, financial anxiety, financial behaviors and knowledge is sparse. Thus, the objective of this study was to examine the associations among student loan repayment behaviors, financial anxiety, and thinking about finances.

Methods: The study used a subset of data from the 2021 National Financial Capacity Study (NFCS) and included only those respondents who had student loans and were repaying it (n=2,101). Two major analyses were performed. First, a multinomial logistic regression was performed to test if thinking about finances predicted student loan repayment behaviors (never late, late once, and late more than once), after controlling for financial knowledge, financial behaviors, and demographics. Next, an OLS regression was performed to examine if thinking about finances predicted financial anxiety (on a scale of 1-7).

Results: Results of multinomial regression suggested that a unit increase in thinking about finances increased the odds of being late on student loan repayment by 29% (late more than once vs on-time repayment), but lowered the odds of being late on repaying student loan debt by 17.4% (late once vs on-time repayment). Better financial behaviors decreased the odds of being late on student loan repayment by 47% (late more than once vs on-time repayment) and 35% (late once vs on-time repayment). Increase in objective financial knowledge scores lowered the odds of being late on student loan repayment by 26% (late once vs on-time repayment) and 24% (late more than once vs never late). OLS regression results showed that thinking about finances significantly predicted increase in financial anxiety and subjective financial knowledge scores and decrease in financial behaviors and objective financial knowledge scores.

Conclusions: Findings suggest that thinking about finances taxes individuals’ mental bandwidths which can have negative consequences on financial behaviors (e.g. increase in delinquency and defaults) and mental health (e.g. increase in financial anxiety); thus creating a cycle which is difficult to overcome in the future. This has implications for designing interventions that target socioeconomically vulnerable groups that face disproportionately high amounts of debts, repayment issues, and lack access to mental health treatments and services. Social workers and counselors who work with such vulnerable population groups need to inform their interventions by developing a deeper understanding of how thinking about finances consumes considerable mental bandwidths of individuals, particularly for those with mental health issues.