When people take out student loans for themselves, there are certain risks involved. Debt can negatively affect a person’s mental, emotional, and even physical well-being. It can also harm a person’s financial well-being.
But when you take out a student loan for your child, the risk is even greater that the loan will be associated with lower financial well-being.
That’s what Charlene Kalenkoski and I discovered in our peer-reviewed study published in the Journal of Personal Finance. The study – which used a nationally representative federal data set on household economics and decision-making – involved nearly 12,500 American adults aged 18 and older, with an average age of 48 years old. It is not known whether the parents took out private or government loans for their children.
By lower financial well-being, we mean that these parents were more likely to report feeling like they could never have the things they want in life or that they “just get away with it financially.” . They also report feeling a lack of control over their financial situation. These statements are part of what the US Consumer Financial Protection Bureau uses to measure financial well-being. Lower financial well-being decreases overall well-being.
Our results remained consistent even after taking several other factors into account, such as parents’ education level, whether or not they work, how much they earn per year, and how they spend their money. We also took into account their financial literacy and current financial pressure.
The Consumer Financial Protection Bureau gives people a Financial Well-Being Score on a scale of 0 to 100. Taking out a student loan is associated with a lower financial well-being score for everyone, but our research has found it to be. revealed that it is associated with a lower score when the loan is for the borrower’s child. For example, taking out a loan for yourself is likely to lower the score by 1.44 points, and taking out a student loan for a spouse probably lowers the score by 1.37 points. However, taking out a student loan for her child was likely to lower financial well-being scores by 1.88 points.
Most students depend on loans
In discussions of public policy regarding people who take out student loans, it is not always clear whether the loan is for themselves or for someone else, such as the spouse or child of the student. borrower. Knowing this information provides insight into the relationship between student debt and the well-being of the borrower if the loan is for their children.
In 2020, 64% of college graduates funded their studies through student loans, accumulating an average debt of $ 29,927.
The combined amount of federal and private student loans – as well as the number of borrowers – continues to increase. The total amount of student loan debt reached $ 1.75 trillion as of November 30, 2021, and the total number of borrowers stood at 47.9 million.
Negative effects on households
These student loan debts have negative effects on individuals, households and the US economy. Therefore, the federal government is considering the federal student loan exemption. In a letter from December 2021, several Democratic lawmakers urged President Biden to extend the hiatus on student loan payments – which ends in January – and act to cancel student debt.[Get the best of The Conversation, every weekend. Sign up for our weekly newsletter.]
Lawmakers are calling attention to the “significant disparities” that contribute to the racial wealth gap. “Twenty years after starting college, the median black borrower still owes 95% of their loans, compared to just 6% for the median white borrower,” lawmakers note, citing a 2019 Brandeis University study.
Studies have shown that student debt influences household decisions and outcomes. This includes delayed home ownership, a lower likelihood of having stocks, a lower likelihood of life satisfaction, and lower financial well-being compared to those without student loan debt. .
Our study used a dataset for 2017. The long-term effects on the financial well-being of parents after taking out loans for their children’s college education is not known. Having datasets over longer periods of time would allow us to examine whether loans lead to a decline in financial well-being at different stages of parents’ life, such as when their children finally move out or when parents retire. .