How Different Forms of Debt Affect Our Mental Health: Study

Since the end of 2019, the accumulated household debt of Americans has increased by $2.36 trillion, reaching a total of $16.51 trillion. According to the Federal Reserve Bank of New York, mortgage balances increased by $282 billion in the third quarter of 2022, up $1 trillion from the previous year for a total of $11.67 trillion. Credit card balances increased by $38 billion, auto loans by $22 billion, and retail credit cards and other consumer loans by $21 billion. Only student loan debt trended in the other direction, decreasing slightly to $1.57 trillion, due mainly to debt-relief initiatives like the Closed School Discharge and the Public Service Loan Forgiveness program. And between July 1 and September 30, 2022, approximately 99,000 Americans filed for bankruptcy, following the trend of historically low rates that began the previous year.

As the personal financial situation of many Americans continues to evolve, improving in some areas while declining in others, we wanted to know if the various forms of debt could have differing effects on mental health. We asked over 1,000 people to find out.

• Gen Z had the fewest number of respondents with zero home loan debt (15.5%).
• The average outstanding balance for a home mortgage was found to be $77,270.
• Gen X had the most respondents with no outstanding student loan debt (60.7%) or home loan debt (39.6%).
• Credit card debt had the highest average interest rate (6.95%).
• Credit card debt was also the most troubling for the largest proportion of respondents (38.2%).

To better understand how various types of debt might affect Americans’ mental health, we surveyed 1,063 people about their accumulated debt, lifestyle, and spending and saving habits. From our survey, we were able to gain insights into which forms of debt were most detrimental to peoples’ mental health, as well as the type of mental health issues most associated with debt accumulation. We also discovered which generation is most affected by outstanding debt, how they are attempting to pay it down, and how paying off their debt (or not) affects their quality of life.

More than half of our respondents reported having home loan debt (63.1%) or credit card debt (60.1%), while less than half reported having student loans (42.3%) or auto loans (39.1%) hanging over their heads. Regardless of the type of debt, however, all our respondents expected to have their debt completely paid off within the next five years.

The second largest cohort for each category claimed they would have their credit cards (22.3%), cars (10.5%), and student loans (9.5%) paid off by 2024. When it came to mortgages, however, the second largest group of respondents (14.8%) thought it would take them ten years or more. This makes sense, as the average outstanding balance for a home loan turned out to be significantly higher than the other categories:

• Home loan: $77,270
• Student loan: $11,640
• Auto loan: $9,100
• Credit cards: $7,660

However, home loans did have the lowest annual interest rates. Credit cards had the highest:

• Credit cards: 6.95%
• Auto loan: 4.33%
• Student loan: 4.13%
• Home loan: 4.03%

This could explain why 75.3% of respondents said they plan to wipe out their Amex bill within the next five years. Eager to be debt-free, the majority of our respondents (31%) said they were paying $400 to $700 per month toward their outstanding debt, while just 7.4% were paying $100 or less.

Aside from sky-high interest rates and the desire for financial freedom, we discovered other incentives exist for paying off your credit cards.

Going debt free

Gen X had the most respondents with no outstanding debt, including the most respondents with no student loan debt (60.7%) or home loan debt (39.6%). Credit card debt was the only category where they trailed slightly behind Gen Z and millennials.

Despite being the youngest generation, Gen Z reported having the most mortgage debt, with just 15.5% claiming to have none, compared to 37.8% of millennials and 39.6% of Gen X. Gen Z’s interest in owning property, however, could be a sign of positive changes happening within the real estate buying system.

Gen Z has been exploring new ways of buying property by utilizing crowdfunding technology, which allows multiple stakeholders to invest in a single property. On the residential side, this might look like cooperative housing, enabling young people to invest in real estate while building a community. Technology and an evolving global consciousness have also helped mitigate racial, cultural, and socioeconomic biases, including practices like redlining, built into real estate investing at its inception.

Moral incentives

In a small 2019 study published in the Journal of Political Economy, a large bank in Indonesia attempted to incentivize people to pay down their credit card debt by hitting their morals. When payments were due, the bank sent a text reminder to its customers: “non-repayment of debts by someone who is able to repay is an injustice.” As a result, payment delinquency decreased by 4.4% (from a baseline of 66%), as did the frequency of default among those with the highest ex-ante credit risk.

On the other side of this argument, many people point the finger of moral judgment back at the banks. The rise of “datafication,” or the use of personal data (including a person’s social media activity and mobile phone data) for consumer credit decision-making, has generated some cause for moral concern surrounding individual privacy, autonomy, identity, and dignity. Using sophisticated, data-driven machine learning algorithms, lenders can more easily abuse data-driven financial insights, allowing them to target, for example, more vulnerable populations of consumers with unfavorable credit offers.

How significantly these practices contributed to our respondents’ debt and subsequent anxieties is difficult to say for certain. But those individuals with mounting credit card debt, of which there were many, would benefit from maintaining an awareness of datafication and its avenues for abuse. It’s certainly possible these moral concerns play a factor in how we feel about our debts and how much pressure we put on ourselves to pay them back, even (as we’ll get into later) at the expense of things like going to the doctor.

A significant percentage of our respondents said their debt gave them anxiety always or often, with credit card debt being the most troubling (38.2%). Of the various mental health issues associated with outstanding debt, the majority of respondents claimed stress to be the most common:

1. Stress: 60.4%
2. Anxiety: 48.7%
3. Depression: 44.3%
4. Restlessness: 19.8%
5. None: 16%

The form of debt most participants believed negatively impacted their mental health, in general, was mortgage debt (35.6%), followed by credit card debt (28.9%), student loan debt (16.6%), then auto loan debt (7.8%). 11.2% of participants claimed they did not experience any mental health issues related to their debt.

However, this was not the case for more than half of Gen Z (54.4%) and a third of millennials (33.9%), who claimed to struggle mentally because of home loan debt. Credit card debt plagued Gen X the most (43%), while both auto loans (10.7%) and student loans (19.5%) took the heaviest toll on Gen Z.

What’s eating Gen Z?

Overall, Gen Z appears to be struggling the most regarding mental health issues from their outstanding debt. It would be easy to point the finger at U.S. inflation rates, which are certainly high — 6.4% as of January 2023 — but have gone down significantly after peaking at 9.1% in June 2022. The housing market isn’t in great shape right now either, with mortgage rates falling back to 6% after breaking 7% in November 2022. Even as mortgage rates continue to improve, though, home prices are still expected to fall by as much as 9%.

The prevalence of mental health concerns reported by Gen Z could also be due to the fact that, compared to the older generations, they have been historically more concerned about common societal issues, such as work, money, mass shootings, sexual harassment, and civil rights. Perhaps we should add the economy, inflation, and mortgage rates to that list as well.

Not a buyer’s market

Participants of our study were particularly bothered by auto loan interest rates. Stress was the most common mental health issue participants reported experiencing because of their auto loans, even at 0% interest rates, where 56% of people were affected. For rates that were 7% or higher, respondents reported feeling a mix of stress (72.4%), anxiety (59.1%), depression (49.6%), and restlessness (22.8%).

Currently, it’s not a buyer’s market for used cars. From December 2022 to January 2023, after a steady decline of around 15% over the previous year, the average price of used cars rose by 2.5%. Used cars are one of the largest components of the Consumer Price Index (CPI), making up 4.5% of its core, which means that any increase in the price of a used Toyota Corolla could also mean an increase in inflation overall is just around the bend. An uptick in auto interest rates could be seen as a bad omen or the source of our respondents’ anguish.

Despite recent increases in the cost of fuel (26%), energy services (14.3%), and food and beverages (10.1%), just 19.5% of all respondents said their outstanding debt has kept them from saving money. However, more than half still claimed they had to either hold off on vacations (65%) or skip routine self-care (59.1%) because of their debt.

Breaking down the data by generation, we discovered that our Gen Z cohort was taking the biggest hit in their quality of life. They were the generation most likely to hold off on vacations (82.3%), skip routine self-care (84.2%), postpone having children (61.4%), and miss a doctor’s visit (41.4%). On the other hand, only a small percentage (7.4%) claimed they were unable to save money because they were using their extra cash to pay off loans.

For the majority of our participants, saving money appears to take priority over having children, taking vacations, regular self-care, and even seeing the doctor. Perhaps having cash in the bank is more comforting for them than a Swedish massage, a trip to the Bahamas, or having their cholesterol checked. After all, you can save as little as $5/month and still call it savings, whereas you’re looking at potentially adding to an already-stressful amount of debt by making large purchases.

Financial literacy

Our Gen Z participants were the most concerned with their future financial security, perhaps because of their susceptibility to debt-related mental health issues or the rocky political and economic climates in which they’ve matured. When it came to either saving for retirement through their job (49.3%) or saving on their own (43.3%), Gen Z had the highest percentage of respondents expressing doubt, despite financial literacy being down across all generations. In fact, according to a 2021 study, Gen Z had the lowest financial literacy levels, which runs contrary to what we found in our research.

The study organizers, the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University (GW) School of Business, used a tool called the P-Fin Index to measure financial literacy. Using the responses of a 28-question survey, the P-Fin Index estimates the ability of U.S. adults to make sound financial decisions and effectively manage their personal finances. The survey questions are based on the following criteria:

• Earning
• Consuming
• Saving
• Investing
• Borrowing/managing debt
• Insuring
• Comprehending risk
• Sources of information

Many Americans will never fully recover, financially or otherwise, from the hardships created by the COVID-19 pandemic. For many others, though, the pandemic highlighted areas of vulnerability where personal knowledge about finances could likely be improved, potentially helping many of us avoid future financial strife.

We surveyed 1,063 people about their accumulated debt, lifestyle, and spending and saving habits to better understand how various types of debt might be affecting Americans’ mental health. Through our survey, we sought to gain insights into which forms of debt were most detrimental to peoples’ mental health, as well as the type of mental health issues most associated with debt accumulation. We also hoped to discover which generation was most affected by debt, how they were attempting to pay it down, and how paying off their debt (or not) affected their quality of life.

Innerbody Research is committed to providing objective, science-based suggestions and research to help our readers make more informed decisions regarding health and wellness. We invested time and effort into creating this report to better understand how debt of various types might be affecting Americans’ mental health. We hope to reach as many people as possible by making this information widely available. As such, please feel free to share our content for educational, editorial, or discussion purposes. We only ask that you link back to this page and credit the author as Innerbody.com.

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