The Influence of Education-Related Debt on Financial Distress and Consumption
AbstractBy examining how student borrowers fare financially after graduation, we attempt to further the existing knowledge of the costs associated with education debt and the manageability of the typical debt burden. We use data from the Survey of Consumer Finances, and compare the financial stability of individuals who have borrowed for education to similar individuals who have not. Using the SCF repeated cross-sections from 1989 to 2010, and an IV approach (Gicheva and Thompson, 2015) we show that, keeping education constant, more student debt is associated with higher probability of being credit constrained and greater likelihood of declaring bankruptcy, particularly for individuals who accumulate debt but do not complete a Bachelor’s degree. We find evidence that homeownership rates may also be affected by education loans. Controlling for earnings tends to strengthen these relationships, which is consistent with omitted variable bias combined with positive return to student loans.Using the SCF 2007 to 2009 panel (Bricker and Thompson, 2016) we show that families with student loans in 2007 have higher levels of financial distress than families without such loans, and these families also transitioned to financial distress at higher rates during the early stages of the Great Recession. This correlation persists once we control for a host of other demographic, work-status, and household balance sheet measures. Families with an average level of student loans were 3.1 percentage points more likely to be 60 days late paying bills and 3 percentage points more likely to be denied credit. Families with other types of consumer debt were no more or less likely to be financially distressed.
Additional work will explore the impacts of student borrowing (in both the SCF panel and cross-sections) on consumption.