The Role of Federal and Private Student Loans in Homeownership Decisions

This paper examines the effect of student loans on the decision to become a homeowner. Analyses use the Baccalaureate and Beyond 2008:2012 (B&B) panel dataset collected by the U.S. Department of Education that surveyed a representative sample of four-year college graduates from institutions across the country. Whereas previous analyses of student loan debt rely on cumulative loan balances, the present research examines both federal and private student loan impacts separately. Private student loan data is often unavailable in major datasets, but the B&B data provide rich information on sources and amounts of debt for recent graduates. We instrument student loans using in-state tuition rates and find that for four-year college graduates, a $1,000 increase in a respondent's private student loan balance lowers the likelihood of buying a home by about 5 percentage points whereas a $1,000 increase in federal loans has no significant impact on homeownership during this time.     

Determinants of indebtedness among young adults: Impacts of lender guidelines,explicit information and financial (over)confidence

For most people, borrowing money is a necessary aspect of life in the 21st century. Wisely handled, loans give consumers access to consumption too expensive for most individuals to purchase with cash, such as homes and cars. However, history shows that taking on too much debt can be detrimental for the individual consumer as well as society as a whole. In this paper, we investigate determinants of over‐indebtedness among young adults. We perform three studies in a setting focused on buying and borrowing money for a home. We show that, compared with an overall mortgage amount, explicit information about monthly payments reduces the tendency to take on too much debt (Study 1), that the amount borrowed depends on standards regarding the loan amount communicated through guidelines from the lender (Study 2), and that borrowers who are overconfident about their financial abilities tend to borrow more than less confident individuals (Study 3). These determinants and their policy implications are discussed.     

Parental financial support: A safety net for young adults with debt problems

Parental financial support benefits young adults in societies with decreasing welfare‐state support and a pattern of early home‐leaving. This article focuses on the association between young adults’ debt problems and parental financial support: the extent to which indebted young adults receive financial help from their parents. We also investigate the extent to which specific benefits are associated with debt problems or parental financial support. The data were gathered in an online survey conducted among 18‐to‐35‐year‐old Finns (n = 1,019). The results revealed, first, that many parents safeguard their indebted adult children’s lives by means of financial support and second, that heavy cash‐welfare‐benefit users are particularly likely to receive parental financial support. Our analysis also revealed that the prevalence of debt problems as well as of parental financial support were especially high among those who had received social assistance, sickness benefit or labour‐market subsidy within the previous 12 months. In a society open to new social risks as well as to debt problems, young people who lack financial support from their parents have a rockier transition to adulthood than those who receive support.     

Borrowing Capacity and Financial Decisions of Low‐to‐Moderate Income First‐Time Homebuyers

This study documents the extent to which first‐time homebuyers seeking a mortgage accurately estimate their borrowing capacity and how this is associated with their decisions regarding mortgage debt and the take‐up of a free offer of financial coaching. We find that consumers who underestimate their nonmortgage debt (31.5% of the sample) also take out larger mortgages relative to income. Consumers who underestimate or overestimate their total debt as well as their monthly debt payments are more likely to accept the offer of financial coaching. Moreover, overconfidence in financial matters reduces the take‐up of financial coaching. These biases in perceived financial status appear to be systematically related to behavior among a group of relatively inexperienced consumers. These findings suggest that efforts to extend homeownership may need to include debiasing mechanisms to help less informed consumers accurately assess their current debt levels and ability to make ongoing mortgage payments.     

Local Conditions and Debt in Collections

Using credit reporting firm records on 7 million individuals in the United States, we first demonstrate that debt in collections varies significantly across the country; specifically, the South and West regions have higher shares of individuals with debt in collections than other regions. Second, we identify local factors that are strongly related to debt in collections. Results from our regression models show that neighborhoods with higher rates of debt in collections are more likely to have (1) lower health insurance coverage; (2) lower home values and homeownership rates, (3) a higher share of delinquent and underwater mortgages, (4) lower household incomes, and (5) a higher share of African Americans and Latinos. While our analysis does not identify the causal mechanisms that determine financial distress, the analyses developed here can facilitate research on such mechanisms.     

Financial capability of student loan holders who are college students,graduates, or dropouts

Effective consumer financial education provides relevant information to meet special needs of targeted audiences. The purpose of this study is to examine differences in financial capability among student loan holders who are college students, graduates, and dropouts. Using data from the 2015 U.S. National Financial Capability Study, the results show that student loan holders who have completed their education program have higher scores in all financial capability indicators than college students and dropouts. Further analyses show differences in specific financial knowledge items among college students, graduates, and dropouts. In addition, college graduates are more likely to perform several specific desirable financial behaviors than college students and dropouts. The findings suggest that financial educators should emphasize action taking when they provide financial education for student loan holders who are college students and dropouts.     

Does Student Loan Debt Contribute to Racial Wealth Gaps? A Decomposition Analysis

There is evidence of a large and growing student debt burden over the last decade. Previous research has shown that the presence of student debt jeopardized the short‐term financial wealth of U.S. households during the Great Recession. We examine the effects of student loan use on the wealth of U.S. households post‐recession, using recent data from the 2013 and 2016 Survey of Consumer Finances. We find that mean 2016 wealth for households with no outstanding student debt is more than four times higher than households with student debt. We find that living in a household at the 15th, 30th, 50th, 70th, and 85th percentile of the wealth distribution with student debt is associated with an 80%, 49%, 37%, 35%, and 36% wealth loss compared with a similar household with no student debt. Our decomposition results suggest that student loan use can explain between 3% and 7% of the Black‐White wealth gap across the wealth distribution but is insignificant in explaining the Hispanic‐White wealth gap.     

Young adults’ attitudes towards credit

This research project was undertaken to study young adults’ attitudes towards credit in general. A sample of 980 young Canadian adults, ages 18–29, participated in a telephone survey. Results reveal that they recognize both the advantages and the risks associated with credit. Regression analysis shows that attitudes towards credit is positively related to education, the number of credit cards held and knowledge of credit, but negatively related to the number of children. The young adults who reported that their parents and friends are heavy credit users are more likely to have positive attitudes towards credit. No link was found with the participants’ level of debt.     

Capital structure decision making: A model for family business

Most theoretical and empirical studies of capital structure focus on public corporations. Only a limited number of studies on capital structure have been conducted on small-to-medium size enterprises (SMEs), and this deficiency is particularly evident in investigations into factors that influence funding decisions of family business owners.Theory indicates that there is a complex array of factors that influence SME owner-managers' financing decisions. Recent family business literature suggests that these processes are influenced by firm owners' attitudes toward the utility of debt as a form of funding as moderated by external environmental conditions (e.g., financial and market considerations).A number of other factors have been shown to influence financing decisions including culture; entrepreneurial characteristics; entrepreneurs' prior experiences in capital structure; business goals; business life-cycle issues; preferred ownership structures; views regarding control, debt–equity ratios, and short- vs. long-term debt; age and size of the firm; sources of funding for growth; attitudes toward debt financing; issues relating to independence and control; and perceived risk and attitudes toward personal risk.Although these factors have been identified, until now there does not appear to have been any attempts to develop empirically-based models that show relationships between these factors and family business owners' financing decisions. Utilizing theories derived from divergent disciplines, this study develops an empirically tested structural equation model of financing antecedents of family businesses. Participants of our study involved a random sample of 5000 business owners who were mailed a 250-item Australian Family and Private Business questionnaire developed specifically for this investigation.Notably, our findings reveal that firm size, family control, business planning, and business objectives are significantly associated with debt. Small family businesses and owners who do not have formal planning processes in place tend to rely on family loans as a source of finance. However, family businesses in the service industry (e.g., retailers and wholesalers) are less likely to use family loans as are those owners who are planning to achieve growth through new products or process development. Use of capital and retained profits is likely for family businesses planning to achieve growth through an increase in sales but less is likely for family businesses in the manufacturing sector and lifestyle firms. In addition, debt and family loans are negatively related to capital and retained profits. Equity is a consideration for owners of large businesses, young firms, and owners who plan to achieve growth through increasing profit margins. However, equity is less likely to be a consideration for older family business owners and owners who have a preference for retaining family control.Our findings suggest that the interplay between multiple social, family, and financial factors is complex. In addition, our findings indicate the importance of utilizing theories that also help to explain behavioral factors (e.g., owners' needs to be in control) that affect financial structure decision-making processes. Practitioners and researchers should consider the dynamic interplay among business characteristics (e.g., size or industry), behavioral aspects of business financing (e.g., business objectives), and financial factors (e.g., gearing levels) when working with and researching family enterprises.     

Consumer bankruptcy in Utah (USA): who files and why?

This study examined consumer debtors who filed for bankruptcy and their reasons for filing in Utah, the U.S. state that ranked first in household filing rate in 2002–2004 and consistently ranks in the top ten of the 50 states. The purpose of the study was to determine the demographic characteristics of debtors and reasons for filing. Data were collected during 2004–2005 via survey from 508 debtors. The debtors reported employment problems, medical expenses, divorce or other family problems, as well as trouble managing their finances and overuse of credit cards. More than half of the debtors owed medical providers. Debtors were more likely to report a reduction in income than job loss. Self‐employed persons were over represented. Respondent debtors are less educated, less likely to be married and less likely to own a home compared with Utahns and other Americans. Contrary to expectations, debtor households were smaller than the state average, which may be due to the young age of debtors. Results suggest that in order to reduce the bankruptcy rate in Utah, consumer educators should target renters, adults with less than a college education, divorcing persons and small business owners. Utah's mandate for a personal finance graduation requirement should be implemented early in the secondary school curriculum.     

Debt problems,home‐leaving,and boomeranging: A register‐based perspective on economic consequences of moving away from parental home

This article analyses the development of financial problems after leaving one's parental home, and considers how financial problems are associated with likelihood of boomeranging (i.e., adult children returning to parental home). The 9‐year follow‐up study focused on a nationally representative sample of Finnish young people between the ages of 15 and 25 who moved out from their parental home between 2006 and 2009 (n = 9,196). The measure of debt problems was based on monthly data on debt enforcement, a legal matter which may bring serious consequences for the debtors. The primary within‐individual, longitudinal analyses showed that debt problems increased directly after leaving parental home. Education and family background were significant predictors of debt problems in the four years after leaving parental home. Early leavers had significantly more debt problems than later leavers. Debt problems were associated with a higher likelihood of moving back to parental home. The results imply that it is important to support economic decision‐making during early adulthood.     

An Examination of Participation in Homebuyer Education and Counseling Services

Homebuyer education and counseling aims to help potential homebuyers understand benefits and risks of homeownership, choose a home and an appropriate mortgage, and build the financial know‐how needed for sustainable homeownership and financial health. U.S. Department of Housing and Urban Development's (HUD's) First‐Time Homebuyer Education and Counseling Demonstration found that women and individuals with greater education were generally more likely to participate in services. Enrollees referred to in‐person services are more likely to participate if they are early in the homebuying process or if they planned to purchase a home without a coborrower. They may perceive benefits of services to outweigh the costs of scheduling, traveling to, and attending in‐person services. Enrollees offered remote services (phone, online) are more likely to participate if they are “better off,” having higher mortgage literacy and credit scores. Results may inform agencies' messaging, outreach, and approach to providing services and meeting consumers' needs, federal policy, and interpretation of future impact estimates.     

Objective measures as a predictor of late payments by high‐risk borrowers

Manufactured homes (also known outside the US as prefabricated homes) are a viable housing option for low‐income buyers, but traditional mortgages are not available for purchase of manufactured homes because of a perception of higher risk of default among purchasers of manufactured homes. Research suggests that creditscoring models which incorporate objective data such as income, debt‐to‐income ratio and credit history result in an accurate and objective predictive tool to estimate likelihood of late payments and default among traditional home buyers. This study showed that these same models can be applied similarly to purchasers of manufactured homes. A Tobit model was developed to evaluate which factors most accurately predict default and late payment behaviour among borrowers who purchased a manufactured home. The model showed that when decomposed into the probability of making a late payment and number of late payments, credit score and income are both significant predictors in both sets of borrowers of both the probability of making a late payment and the number of late payments. The higher the credit score, the less likely the borrower is to make a late payment.     

The Interdependence of R&D Activity and Debt Financing of Young Firms

We investigate the interdependence of debt financing and R&D activities of young firms. Applying a bivariate Tobit model, we find that there is a positive interdependent relationship between the share of loan financing and R&D intensity. A higher share of loan financing allows for more R&D in young firms and, at the same time, a higher R&D intensity allows for a higher loan share. This result is mainly driven by start‐ups exhibiting high values of R&D intensity or leverage. Another remarkable result of our study is that the positive relationship between R&D and loan financing can only be detected if we consider that, first, the decisions on R&D and on loan financing are made simultaneously and, second, the decision on R&D impacts the decision on loan financing and vice versa.     

Young adults’ consideration of their food choices a propos consequences for their future health

Many researchers have devoted much time and effort to explain the undesirable health outcomes associated with an excessive intake of certain types of fast foods. Particularly vulnerable, are young adults who move out of their parents' homes to live on their own, and then begin to rely on the multitude of so‐called “food away from home” options which are convenient, available and even desirable in their social circles. This study investigated young adults' consideration of the consequences of their consumption of food eaten away from home due to concern about unacceptable habitual behaviour that might negatively affect their future households. The survey involved 395 young adults up to 25 years of age who completed a structured questionnaire which relied on an established Consideration of Future Consequences scale. Data analysis involved exploratory factor analysis, t‐tests and Anova. Findings revealed some concern about the immediate consequences of respondents' fast food consumption, but concern about the future consequences seemed rather distant in their minds. Although significant differences were confirmed within gender and among population groups with regard to immediate concern about their fast food consumption, the means were nevertheless low throughout indicating that much needs to be done to sensitize young people about every day food consumption that might have dire consequences for their future health.     

Debt Judgments as a Reflection of Consumption-Related Debt Problems

In connection with the strengthening and enlargement of financial markets, i.e., financialization, financial services and products play a major role in the everyday lives of consumers. One drawback of this trend is the increase in the number of debt problems. The data used in this article consist of Finnish district-court judgments related to debt that in most cases was consumption-related, and register-based data on debtors. We first compare debtors to the entire population of Finland by age, gender, marital status, and education, and also in different age groups. The focus then turns to the four most common types of debt in the judgments (based on consumer credit, operator services, distance selling, and credit card debts), and how age, gender, marital status, and education related to these debt types. According to the results, consumers under 30 years of age, in particular, men, those with a basic level of education, and the divorced were over-represented in the data, compared to the overall Finnish population. Young single adults were particularly likely to have accrued smaller amounts of debt related to instant loans and operator services, whereas more extensive consumer credit as well as credit card debt tended to be a problem among retirees. Credit card debt, as well as debts to lending firms, were more common among those with tertiary education than among those with a basic education. Overall, the adverse effects of financialization focused especially on young people with a low level of education. The results also indicate that legislation could partly reduce the negative effects of financialization.

     

Commitment lending under asymmetric information: Theory and tests on U.K. startup data

U.K. business startup data is used to examine the role of contract parameters in solving the bank's problem of lending under asymmetric information. Margins are found to be a direct function of the probability of failure and an inverse function of security (for given loan size) consistently with collateral being invoked to solve the Moral Hazard problem. Business survival is also found to be enhanced by owner equity inputs (for given debt) again consistent with a requirement for owner financial inputs to enhance (unobservable) effort. Security rises along with loan size and survival chances, a finding consistent with (a) a firm loan size effect (larger borrowers have lower marginal admin cost to the bank), and with (b) positive borrower self-selection (better borrowers offer collateral because they are less likely to experience forfeiture.) Observable business characteristics are found to play an important intermediary role in the solution to the moral hazard problem. More mature proprietors have more experience, business commitment, assets for borrowing and the willingness to use them for loan collateral. Their contract parameters reflect these facts.     

The Making of Entrepreneurs in Germany: Are Native Men and Immigrants Alike?

This paper uses a state of the art three-stage estimation technique to identify the determinants of the self-employed immigrant and native men in Germany. Their making is surprisingly alike. Employing data from the German Socioeconomic Panel 2000 (GSOEP) release we find that self-employment is not significantly affected by exposure to Germany or by human capital. But this choice has a very strong intergenerational link and it is also related to homeownership and financial worries. While individuals are strongly pulled into self-employment if it offers higher earnings, immigrants are additionally pushed into self-employment when they feel discriminated. Married immigrants are more likely to go into self-employment, but less likely when they have young children. Immigrants with foreign passports living in ethnic households are more likely self-employed than native Germans. The earnings of self-employed men increase with exposure to Germany, hours worked and occupational prestige; they decrease with high regional unemployment to vacancies ratios. Everything else equal, the earnings of self-employed Germans are not much different from the earnings of the self-employed immigrants, including those who have become German citizens. However, immigrants suffer a strong earnings penalty if they feel discriminated against while they receive a premium if they are German educated.     

How federally insured reverse mortgages affect the credit outcomes of older adults

This study examines how the extraction of home equity through the federally insured Home Equity Conversion Mortgage (HECM) affects the credit outcomes of older adults. We use data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel, supplemented with a unique credit panel data set of reverse mortgage borrowers. Using matched sample difference-in-differences with individual fixed effects, we estimate credit outcomes for older adults who borrowed through a HECM between 2008 and 2011, relative to older homeowners not borrowing from home equity. Our results indicate that the HECM is associated with a short-term reduction in revolving credit card debt, as well as a reduction in the probability of bankruptcy. We find some evidence of heterogeneous treatment effects, where older adults with higher levels of consumer debt prior to originating a HECM experience larger subsequent declines in debt, increases in credit score, and steeper reductions in bankruptcy rates.     

Who pays your debt? An important question for understanding compulsive buying among American college students

Compulsive buying, defined as the inability to control purchasing behaviour, is higher among college‐aged students than it is among the general public. The present study examined the factors related to compulsive buying among college students and how those factors differ as a function of who paid the majority of their debt: themselves or their parents. A total of 628 undergraduates from the US completed a questionnaire containing items to measure compulsive buying, personality and financial responsibility. Results revealed that variables predictive of compulsive buying varied depending on the amount of credit card debt that the student was personally responsible for paying. Findings have implications for reducing compulsive buying in college students.