Late last year, researchers at the University of South Carolina and the University of California, Los Angeles, published a report on the relationship between student loan debt and psychological well-being. This study comes in the midst of a plethora of new research attempting to quantify causal relationships between student loan debt and personal outcomes (including home ownership, entrepreneurship and the macro economy). Despite the intense interest in this issue among researchers, this is the first paper that attempts to understand the emotional cost of carrying student loan debt. This question is, in fact, more fundamental than the others being posed in this genre of research, since it could help to explain the mechanism through which debt may be affecting other outcomes. Using a strict classical lens to examine this issue might lead one to conclude that the true cost of carrying debt could be measured in strictly financial terms. However, the widespread and growing discontent among households with student debt paired with the evidence that the financial circumstances of borrowers haven’t radically worsened suggests that an alternate lens may be necessary. In particular, a lens that considers the possibility that student loans take an emotional toll on borrowers, even when wealth is held constant.
The new study, carried out by Katrina M. Walsemann, Gilbert C. Gee and Danielle Gentile, uses data from the National Longitudinal Survey of Youth (1997) to examine the relationship between student loan debt and self-reported psychological health. Survey respondents were asked to answer 5 questions relating to emotional health and the categorical responses were used to generate an index of psychological well-being. Regression analysis was then used to examine the relationship between this measure and debt, including both cumulative borrowing and annual borrowing during in-school periods.
Based on their analysis, the authors report, “cumulative student loans were significantly and inversely associated with better psychological functioning.” In other words, individuals with more student debt reported lower levels of psychological health, when other things are held constant (including occupation, income, education and family wealth). The effect is statistically significant, but it is quite small. They also find that “the amount of yearly student loans borrowed was inversely associated with psychological functioning,” which implies that taking on debt is emotionally costly for students.
This work takes an important first step in helping us to understand the emotional toll of student loan debt, but could benefit from an alternative framework for evaluation. The researchers attempt to control carefully for covariates that are closely related to psychological well-being and debt. With this approach, they are effectively examining the relationship between debt and psychological well-being while holding all else constant, including income. On one hand, this is good, because we know that income is independently related to well-being. On the other hand, it means that the variation in education debt that is being examined in the study is being driven by variation in wealth, which we also know is related to psychological well-being. As a result, this research falls short of being able to tell us whether student loan debt pays an emotional toll that is any greater than the toll imposed by other debts or financial obligations.
An alternative framework, which is arguably more difficult to implement, would hold wealth constant while varying debt. Since this may seem like a semantic difference, I’ll provide an example. Consider that an individual, Sally, could be in one of two scenarios. In the first, she earns a monthly income of $1,000 and has no debt. In the second, she earns $1,500 each month but has to make a $500 payment on a student loan each month (assume that this payment is made in perpetuity for the sake of simplicity). The level of wealth is constant between the two scenarios, but she has a debt obligation in one and not in the other. The question that is relevant to policymakers is; which of these scenarios does Sally prefer? Or alternatively, by how much does she prefer the scenario in which she doesn’t carry any debt? This example is overly simplistic, but with a slightly more realistic example, one could also ask how Sally’s distaste for the scenario that includes indebtedness would change if the period (duration) of the loan were different or if payments were building equity in a transferable asset (i.e. a car or house).
The answers to these questions will tell us how concerned we need to be about the growing reliance on debt as a means for financing investments in human capital. While debt is an efficient mechanism for enabling access to higher education, it may be the case that debt imposes emotional costs that counter some of the benefits of this efficient mechanism. If research ultimately indicates that carrying debt imposes a significant emotional cost to borrowers, then there may be a role for policymakers to provide some relief. One option would be to alleviate the emotional toll of debt through changing the tone of the public discourse on this issue. The treatment of student debt by the popular media has almost certainly caused some borrowers to worry about their debts more than they would have otherwise. It may be possible to alleviate some concerns about debt through educational programs that help borrowers to better understand their circumstances and the safety nets that are available to them. Alternatively, instruments other than personal debt have the potential to alleviate an emotional tax. For instance, income share agreements, or even a more socialized system for financing education, could succeed in achieving this end. However, all of this should wait until research can tell us a more conclusive story about this issue.
 Walsemann, Katrina, Gilbert C. Gee and Danielle Gentile. 2015. Sick of Our Loans: Student Borrowing and Mental Health of Young Adults in the United States. Social Science and Medicine. 124: 85-93.
 Respondents were asked how often in the past month they felt 1)
nervous; 2) calm and peaceful; 3) downhearted and blue; 4) happy;
and 5) down in the dumps.