Financial capability and informal bankruptcy: comparing student loan holders and non-holders

Abstract

PurposeThe purpose of this study is to examine the association between financial capability and informal bankruptcy, especially among families in which the respondent and/or spouse borrowed student loans to fund their own education and families that did not have such loans.Design/methodology/approachUS nationally representative data were employed. Three family types were used, families with student loans borrowed to fund respondent and/or spouse's education and education was completed (type 1 holders) or not completed (type 2 holders), and families that did not borrow student loans for respondent and/or spouse's education (non-holders). Informal bankruptcy was measured by being insolvent and late in debt payment for 60 or more days. Financial capability was measured by both an index and its various components. Multivariate logistic regressions were conducted to examine associations between financial capability and informal bankruptcy.FindingsGenerally, financial capability was negatively associated with informal bankruptcy, and student loan holders were more likely to be informally bankrupt than non-holders. However, such negative associations were statistically significant for type 1 holders and non-holders but insignificant for type 2 holders. Two desirable financial behaviors (information search and online banking) reduced the chance of informal bankruptcy for type 2 holders.Research limitations/implicationsFirst, cross-sectional data cannot establish a causal relationship. Second, findings using data from a single country may not be generalized to other countries.Practical implicationsFinancial service professionals should help loan applicants evaluate the necessity of borrowing. Banking professionals can use the findings to develop products to meet different consumer needs. Financial educators should target different groups with different strategies in financial capability education. Policymakers should develop policies helping student loan holders complete education funded by student loans.Originality/valueThis study examines factors related to informal bankruptcy, providing insights to warning signs of bankruptcy. This study explores the potential effect of a new factor, financial capability, on informal bankruptcy, filling in a gap in the bankruptcy literature. This study recognizes differences in informal bankruptcy among various types of families and examines the different effects of financial capabilities on informal bankruptcy for different types of families.

Student loan debt in retirement: identifying the correlates and implications for policy, practice and research

“…This study is essential because it extends the existing studies examining the effects of student debt on household decisions and well-being, including homeownership, career choices, stock investments, informal bankruptcy, financial well-being and life satisfaction (Greenberg and Mogilner, 2021; Kim and Chatterjee, 2019; Korankye, 2023; Korankye and Guillemette, 2021; Korankye and Kalenkoski, 2021a, b; Mountain et al. , 2020; Yao and Xiao, 2023). This is particularly true given that not many of these studies have examined the determinants of student loan indebtedness in retirement.…”

“…This suggests that having student loan debt in retirement could be extremely difficult for some retired Americans. This phenomenon is compounded by the fact that student loan debt may not be forgiven even if the retiree files for bankruptcy (Yao and Xiao, 2023). Thus, an empirical analysis of the determinants of student loan debt among retired Americans could empower financial practitioners and educators to identify practical ways to shape decisions regarding student loan debt holdings in retirement.…”