THE STUDY OF INDEBTEDNESS AMONG YOUNG ADULTS AND FACTORS INFLUENCING THEM

AND THEIR EFFECT ON THEIR MENTAL HEALTH, FINANCIAL ADVICE IN THE USA

PRAJWAL.S

PES1PG21MB238

(Prajwal2111997@gmail.com)

DEPARTMENT OF MANAGEMENT STUDIES

PES UNIVERSITY, BANGALORE

DATE : 28TH MARCH 2022

The rising costs of education coupled with job losses and a period of economic stagnation after
the financial recession in 2008 and now the covid-19 pandemic have led to increase in
indebtedness. Gen z and Gen Y are the current generations that belong to the category of
young adults. Young adults form a major component of the workforce and their financial
situation has a great impact on the economy of the country. This study deals with the factors
that lead to increased indebtedness among young adults like marriage, education levels and
behavior traits. The financial strain suffered by them has an impact on their mental health and
the level of strain caused by them varies with the loan category. What is the potential for
household debt and debt overhang has long been the focus of academic research and society
generally . Numerous government reports show there has been increased debt and below the
average income of household in most Western countries in recent decades . Before the
financial crisis, research shows a lot of increasing in the proportion of family debt to income
that has not been used in United States of America .

KEYWORDS : Indebtedness, borrowings , student loans , income levels , millennials

INTRODUCTION

GEN Z

Gen Z refers to the generation of people who are born between the years 1997 to 2012. The
oldest of this generation have started to enter the work force and are in pursuit of their post-
graduation . Some of them have even started to have families of their own. They currently have
very little to no financial security. This generation is currently living from pay check to paycheck
and most of them are working to cover their student loans and have some form of credit card
debt. This generation though financially insecure has firm plans about their retirement and
intend on setting a suitable financial plan.

GEN Y

Gen Y or millennials refers to the generation born between the year 1981 and 1996. They are
the largest population at present in the US. They face many financial obstacles in raising their
families and are still working off their student debts. They are very ambitious generation and
want to pursue them while still young and not wait until a later stage like the previous
generation.

Education Loan: It is the loan borrowed to for the purpose of pursuing under graduate and
post graduate education. They cover the tuition costs , books and supplies as well as the living
expenses during education period . Payments are deferred until the students have completed
their college and are also given 6 months grace period before starting to pay off these loans.

Credit Card Debt: Credit cards are a useful source of credit for purchases from time to time.
But it also has its downfalls the interest rate on non-payments is very high, also people tend to
spend more use credit cards compared to other forms. The debt accumulated over a period of
time by borrowing through multiple credit card accounts is credit card debt. It is one of the
major financial crises that current generations face.

Home and Car Loans : It is the financial service availed to own car and housing . The rising
cost and the economic stagnation after the recession have led to reduced salaries and most of
the people are availing these services to fulfill their dream of owning a house or car.

Indebtedness: It is the condition in which a person has an obligation to repay the loans or credit
service one has availed based on the terms and condition agreed priorly.

Literature Review :

1. The level of anxiety of not being able to consume goods and services at similar levels to
that of their contemporaries has proved as the significant source of worry for the
current generation of adults. In this ambition of being satisfied ha sled young adults to
avail credit . This credit is expected to play a major role in meeting the consumption
demands of this generation. Young adults as a result of their lack of experience have led
them to borrow in ways that are contrary to the conventional financial standards . The
financial literacy or knowledge is generally low in the society but it is significantly lower
among the home buyers who are not experienced . Taking housing loans at higher rates
have a negative impact on financial wellbeing. To define excessive indebtedness , it is
reasonable to begin from the concept that house hold debt capacity and household
debt service capacity . The former is not as significant as the latter. Average house hold
indebted ness is much higher given the widely increasing debt ratio , this at first look like
a large portion of families have acquired too much of credit . But coming to a conclusion
based on the aggregated data is often misleading . The concept of indebtedness among
individuals must not be mixed put with the economy being in a state of debt , as this is
cause of financial mismanagement by governments and not on the part of the citizens.
The definition of a household can differ from one survey to another because there may
be only one earning adult without anyone else, or two people living together with or
without children. So the concept of household cannot be generalized. The return to
scale effect of living in a family together can have an impact on the cost of living as the
expenses are divided in some cases. The actual household dependence on debt may be
uneven distributed among household types according to ability to earn and ability to
manage installments and payments of interest on the debt taken. Numerous studies
analyze the impact of literacy and financial literacy to minimize excessive debt. The main
idea is that if very able to guide people in a better manner about finance, they are very
much less likely to take financial decisions that can lead to trouble in the future. There
are some who argue that this ideas places too much importance on a single individual
when it comes to debt problems. They believe that structural issues that plague our
financial institutions and policy making are the main reasons for the financial
indebtedness mess and not that of lack of knowledge about financial instruments. The
concept of better financial communication between the children and parents led to the
 children having a strong understanding of the financial situation and influenced a
positive attitude in terms of expenses and also taking on debts.

METHODOLOGY:

This research paper gives details about the indebtedness among young adults in the present
times. The research was conducted by analyzing various data sources from various research
papers that study about the indebtedness and its causes and impact.

The first section of the research gives an understating of indebtedness and various behavioral
and social aspects that play a major factor in it.

The second section of the research paper gives an understanding of indebtedness caused by
education loans and the varying education levels and it’s impact.

The third section of the research paper gives an understanding of the mental strain suffered
due to indebtedness among young adults and the preferred choice of adviser for making
financial decisions and planning .

The research findings are based on the secondary data collected from three sources :

The US Bureau of Labor Statistic’s National Longitudinal Survey of Youth 1997 (NLSY97)

The federal Reserve Board’s Survey of Consumer Finances

Trans American Survey 2017

RESEARCH :

Behavior and Credit Pattern among Young Adults

When the United States entered the Great Recession in 2007, many Millennials were in their
late twenties. Millennials had unprecedented access to consumer credit in the time period up
to the financial downturn, but acceptance and use of credit cards was dwindling even before
the recession .They had easy access to consumer credit and Millennials took out consumer
credit, took advantage of it effectively. They took in more debt than previous generations, as
they pursue it with more zeal. They also have longer debt and have incurred debts much earlier
compared to others. Millennials with much larger income levels in turn have significantly large
debt as equated to their low-income mates, mainly because of them having difficult home-
buying amount. By the time they reach the end of their 20s, people in the top 25% of income,
on average, have a debt of nearly $120,000, a little more than the average debt for the bottom
three levels of young adults ($70,000, $35,000, and $10,000). This debt levels is combined
including all aspects like student loans , housing , car and credit card debts.

The above graph represents the percentage of people who owned credit cards during the
mentioned time period . We can clearly observe a decrease in number of people owning credit
cards and also a decrease in their credit balance reflecting increased borrowings.
The above graph represents the preference of the type of debts accumulated by young adults

Indebtedness and Social Life

Young adults who had taken educational loans are hesitant to enter parenthood and customer
credit also has a similar impact but not as severe. Millennials who have obtained college
education through loans are very much likely to marriage later in life . Living with partner ,being
married to also led to intensely bigger private debt equated to others .

Despite the snowballing changeability of lanes to adulthood, life changing moments like
university schooling, first home, nuptial and starting a family remain trademarks in American
life from 18 to 30 years old. For Millennials, another feature is a significant increase in debt.
Not only do Millennials have significantly larger loans compared to the people in generations
prior to , these people have any form of debt with a density larger than the total population of
the United States . These distinctions are important since diverse types of obligation have
definite effects. Even though credit card incurred debt and educational loans led to delay in
parenting for Millennials , but education loan caused this outcome to be much stronger .While
some debts affect old markers, some life changes disturb the type and amount of debt. As
Millennials moved from singles to live in a relationship leading to marriage, their debt swelled
dramatically. This was mainly due to housing loans and vehicular loans, but the credit card
accumulated debt also increased by these significant markers.
The above graphs represents the debt level of a person before marriage and after marriage . It
can be observed clearly that the debt level across all types increases after marriage as people
start to settle down and create assets for the better security of their families.

Average 22-year-old youth still single see debt quadrupled over the years. Adults who have
moved in with a significant other or get wedded usually leads to housing loans this led to
personal debt being even larger. Accumulating housing loans is the main thing to explain this
difference. Mortgage is often much larger than other types of loans, and more likely to be
supported in partnership with spouse.

Education Loan

All types of loans including educational loans offer both risk as well as newer opportunities .
The impact of these loans are dependent on the earnings of the family , the tier of educational
institute and the loan amount itself. The educational loans play a major impact in achieving the
significant life event of graduation from a university as shown in this study. It is also observed
that educational loans depend on the student passing out or dropping out from college . This
has a significant impact on his ability to repay the loans as well as the mental health of the
person. People who dropped out have reported to suffering economic hardships and also
increased stress and anxiety levels leading to mental health issues.
Monetary assistance make up differs significantly among the various sectors of college like
public , private . A lower number of students who studied in public colleges took loans
compared to private college as the costs incurred in private institutions are much higher.
Students of for profit universities had better access to federal grants as these universities
attract cream of talent from the country. The chances of passing out with a degree is much
higher when the loan take is of the right amount and not too less or too more that can affect
college completion and financial hardship in the future.

Above graph represents the average student aid availed and what type of aid was most
preferred during the timeline mentioned.

The different forms of assistance like government , university , and private scholarships also
have improved but not as quickly as educational loans. In 1900s, the preferred form of
assistance was scholarships and grants. In the2000s, loans were the most common form of aid.
This graph shows the proportion of people with financial problems and the current status of
their education and their aspect of loans .

This graph represents the average depression scale mentioned by the students and their
education levels and the loan aspect.
Credit Card Debt , Financial Strain and Financial Advice

The above graph shows the financial strain suffered by the low-, middle- and low-income
families during the time of recession.

The above graph represents the anxiety and depression faced by the various income groups of
households due to credit card debts. It can be seen that since middle income earners are more
conservative in spending, they have the least levels
The above graph represents the source of advice that young adults of low,middle,high income
take

Debt may increase the chances to achieve of financial goals in the upcoming years. Credits as
well as debt accumulated by for useful commodities give low-income families access to
commodities and amenities that can advance their quality of life. This allows individuals to look
more paying jobs and get paid larger incomes.

In further cases, debt has lead to psychological and economic stress. While observing the
economic growth of young adults, they may be both a reason and an effect. Prior to the
economic slump, housing loans were linked with mental health profits, which disappeared after
the crisis. Credit card incurred debt, in contrast, is always said to be consistently minus for
psychological well-being. The more credit card induced debt you incur, the greater the adverse
influence on the psychological wellbeing of middle class households. Having debt and also
managing unpaid amounts has the toughest adverse impact on psychological wellbeing among
low class earners. Observing only at monetary issues, youth with income levels of all families
were more likely to report that was difficult to achieve. This was true for all ethnic clusters, but
African Americans had a more high probability of financial struggle. In addition, fiscal
uncertainty in youths amplified with salary risk. Families with remarkably lower earnings, are
73% more likely to default to payments than any other families. Amid young adults, persons
who depended on parents for monetary support had the least monetary burden. People who
took counseling from non-professionals and not their parents had a complex fiscal burden than
young adults who did not receive financial counseling.

CONCLUSION:

Indebtedness among young adults is on the rise for all the factors mentioned above. There case
has been further worsened by the economic stagnation initially caused by the great recession
and as the economy was on a recovery path, it was again hampered by the covid pandemic. The
increase in job losses, stagnation of salaries coupled with inflation in prices all had an impact on
the debt levels. The current young adults have to spend increasingly more to be at the same
level as previous generations. Financial planning as well as retirement planning for the future
has taken precedence in modern days as young adults are becoming more aware of their need
for financial security. In order to reduce the indebtedness, there has to be proper
communication from the institutions about the terms and conditions as well as the future
impact of these debts and the users of consumer credit must exercise caution and must on
indulge in buying non necessary goods and services just for the sake of luxury and comfort and
must be more in line with their income levels.
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