Youth debt, mastery, and self-esteem: Class-stratiﬁed effectsof indebtedness on self-concept

Rachel E. Dwyer

⇑

, Laura McCloud

, Randy Hodson

Department of Sociology, Ohio State University, 238 Townshend Hall, 1885 Neil Avenue Mall, Columbus, OH 43210, USA

Department of Sociology and Social Work, Paciﬁc Lutheran University, Xavier Hall, Room 101, Tacoma, WA 98447, USA

a r t i c l e i n f o

Article history:

Received 27 August 2010Available online 3 March 2011

Keywords:

DebtYouthEducational loansCredit card debtStratiﬁcationClass

a b s t r a c t

Young adults at the turn of the 21st century came of age in atime of unprecedented accessto credit but slowed growth in earnings, resulting in a dramatic increase in indebtedness.Debt has been little studied by sociologists, even though it is increasingly important infinancingbothattainmentandamiddle-classlifestyle,especiallyforyouthinthetransitionto adulthood. We study the consequences of indebtedness for young adults’ sense of mas-teryandself-esteemas stratifiedbyclass. Youngadulthoodisacrucial developmental per-iod for mastery and self-esteem, which then serve as a social psychological resource (ordeficit) into the adult years. Research suggests that young people have divergent perspec-tives on debt: some focus on credit as a necessary investment in status attainment, whileothers worrythat readily available credit invites improvidence that canerode theself-con-cept as debt encumbers achievement and future consumption and increases a sense of powerlessness. We find that both education and credit-card debt increase mastery andself-esteem, supporting the hypothesis that young people experience debt as an invest-ment in the future, and contradicting the expectation that debt used to finance currentspending will lower mastery and self-esteem. Our expectation that debt effects are accen-tuatedforthoseoflower-andmiddle-classoriginsbutbluntedforthoseofupper-classori-ginsissupported.Wefind,however,thatthepositiveeffectsofdebtappeartowaneamongthe oldest young adults, suggesting the stresses of debt may mount with age. We concludethat further study of the long-term consequences of debt will be essential for advancingcontemporary stratification theory and research.

1. Introduction

PopularconcernaboutspiralingpersonalindebtednessintheUShasgrownwithunprecedentedaccesstodebtduringthe2000s credit boom. The housing and banking crises that brought the boom to its dramatic end have highlighted the wide-spread social vulnerability that can result from rising indebtedness. Yet scholars have only a limited understanding of theimplications of debt for attainment processes. The typical focus of stratification research on education, occupation, and in-come largely overlooks financial well-being realized as debt, wealth, and consumption (seeMossakowski, 2008; Spilerman,2000). Eventhegrowingliteratureonwealthfocusesmoreonassetsandnet worththanonthepotentiallydistincteffectsof debt (Henretta, 1979; Keister, 2000a,b). It is by now clear, however, that debt plays an increasing role in supporting con-sumption among American families at the turn of the 21st century (Leicht and Fitzgerald, 2006). Scholars also argue thatdebt effects are highly class stratified, as the middle and lower classes take on debt to supplement incomes that are falling

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Corresponding author.

E-mail address:

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behind those of the more afﬂuent upper classes, who use debt in a context of growing income and wealth (Sullivan et al.,2000).Historical trends like rising indebtedness shape individual biographies and they have particularly important effects forpeople moving through key

life transitions

(Elder, 1994). Popular press coverage of the ﬁnancial collapse and personal debthas focused especially on their impact for people near retirement who have seen their savings evaporate, but there are alsospecial concerns for

youth

moving through the transition to adulthood (Draut, 2006). Congress recognized risks for youngpeopleintherecent CreditCardAccountabilityResponsibilityandDisclosureActof 2009, whichrequiresaparent, guardian,or spouse to be the primary cardholder for anyone aged 21 or younger, along with other protections (Credit CARD Act of 2009). But these protections are partial and easily reversed. The young adult years include key steps in status attainmentsuch as attending and completing college, securing first jobs, and building new households separate from families of origin.Inthispaperwestudytheroleofdebtforthecrucialgenerationofyoungadultscomingofageinanenvironmentwithgreat-er access and perceived need for debt than any previous generation.The current generation of young adults enters into college and early adulthood at a time when minimumwages are nearan all-time low and college tuition is at an all-time high (Slesnick, 2001). In this context, young adults are being lent whatthey might have been paid in previous generations and many will start their careers carrying significant debt (Leicht andFitzgerald,2006;Manning, 2000). Banks,educationallenders,andcreditcardcompanieshaveaggressivelymadethemselvesavailable to facilitate rising debt. The consequences of this new reality of entering adulthood with debt are uncertain. Andthefutureismadeevenmoreuncertainbystagnantwages,risingjobinsecurity,andupwardspiralinghealthinsurancecosts(Mishel et al., 2007). Will higher future earnings allow a sensible repayment plan? Or will debt be a burden that constrainscareer choices, family formation, andhome ownership? Whowill surviveand prosper and whowill flounderin this neweraof acquiring substantial debt even before full adulthood (Mishel et al., 2007)?Wecannotknowwithcertaintyoutcomesthathavenotyetoccurred.Butitispossibletogetearlypurchaseontheroleof youthdebt infutureattainments andtransitions bylooking at the consequences of debt for young peopleas theyprepare toenterintotheircareers. Muchof thepopularandacademicwritingsonyouthdebt concentrates ontheaggregatepatternsof rising indebtedness, but less on how

youth themselves experience

indebtedness and how debt affects key developmentalprocesses.Scholars disagree about the consequences of debt for youth’s self-concept in the sense of

mastery

and

self-esteem

, withsome expecting positive effects as debt facilitates investment in status attainment and others expecting negative effects be-causeof the ﬁnancialstress of consumingbeyondcurrent income. The importanceof debt inachievingkey attainment goalssuch as educationsuggests that there maybe positive effects on mastery and esteemif debt is seen as a rational investmentthat will pay off in the future (Frank, 1999;Bowen et al., 2009). Other research suggests that the sense of mastery and self- esteemmay be early casualties in the process of accumulating debt (Loonin and Plunkett, 2003). In the newenvironment of readily available credit, youth may take on more debt than they can handle, with negative consequences for their sense of self even before longer-term effects on status attainment develop (Manning, 2000). Research suggests, for example, thatyoung people experience more debt stress and anxiety than older groups (Drentea, 2000). The impact of debt on youthself-concept provides evidence on the immediate consequences of indebtedness for the those taking on debt but may alsosuggest a pattern of longer-term effects as mastery and esteem are resources that affect later life outcomes (Mirowsky andRoss,2007;Reynoldsetal., 2007). Perhapsmostimportant,theseeffectsarelikelytodifferbysocial classasdebtmaybetheonlywayto ﬁnancelifegoals for youngadultsfromthe lowerandmiddleclasses, whereas it is onlyoneof a setof resourcesavailabletomoreadvantagedyouth.Youngpeoplearethecarriersofthefutureandtheconnectionbetweentheirindividualexperiences and the emerging structure of society – the connection between history and biography – must be at the core of any sociology of debt.

2. The rise of indebtedness

Americanyoutharetodaycomingofageatatimeofunprecedentedaccesstodebtandsharplyrisingindebtedness.Whilesome focus on individual profligacy and the perceived propensity of ‘‘generation debt’’ to over consume, major political andeconomic changes have laid the groundwork for this shift to debt-based lifestyles (Kamenetz, 2006). The deregulation of financial markets made credit much more widely available as banks were allowed to offer loans to individuals with lessattractive credit histories and lending terms (and fees) proliferated (Black and Morgan, 1999). At the same time, companiesincreasingly invested profits in the financial sector, hugely expanding the liquidity available for loans (Krippner, 2005). Theresult has been a

democratization of credit

, where Americans at the turn of the 21st century have much more access to loansthan in previous decades. This shift has been particularly consequential for groups historically overlooked by the creditindustry, suchas young adults(Kamenetz, 2006). Increasingaccess to credit provides youthabundant opportunityto accruedebt – both to invest in educational attainment and to support current consumption. These unprecedented changes mark asigniﬁcant historical shift that is likely to shape the life courses of the cohorts of youth most exposed to credit during thetransition to adulthood (Elder, 1994; Zaloom, 2009).One of the biggest increases in youth indebtedness is through educationloans. Student debt became more commonwithgrowing enrollments in post-secondary schools and precipitous increases in tuition. From 1977 to 2003 the number of en-rolled students increased by 44%, but student loan volume grew a stunning 833% (Draut, 2006). Increasing college costs ex-

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plain part of the difference – in just the ten years from academic years 1994–1995 to 2004–2005, inﬂation-adjusted tuitionandfeesincreasedbyalmost50%atpublic4-yearcolleges,andby34%atprivatecolleges(CollegeBoard,2009).Studentbor-rowing increased along with college costs, as one-third of full-time, full-year students took on loans in the 1992–1993 aca-demic year, but fully half held loans just 10years later in 2003–2004 (NCES, 2010), with average loan amounts for allenrolled students reaching $7000 (Wei et al., 2009). This leaves the typical graduating senior with $15,123 in federal loans,which even at subsidized interest rates can grow through substantial interest charges each year (Lewin, 2009). With largelystagnant incomes, the burden of college debt repayment has risen from6.7% of after-tax income to 8.5% of after-tax income just between 1993 and 2001 (Choy et al., 2005). While many in society are distressed by the increasing reliance on loans toﬁnanceeducationandargue for greater state subsidies for college tuition(Draut, 2006; Kamenetz, 2006), there maybe littlealternative for middle-class youth looking to secure their class standing and lower-class youth seeking upward mobility(Leicht and Fitzgerald, 2006). Growing earnings disparities between college graduates and those with less education haveraised the stakes for gaining a college degree, making education increasingly important to status attainment (Morris andWestern, 1999).Credit-card debt has also increased sharply among youth. In an analysis of

Survey of Consumer Finances

data,Draut andSilva (2004)report that youth aged 18–24 carried an average of almost $3000 in credit-card debt in 2001, and young adultsaged25–34carried$4000.Consumerloansareattractiveforyouth,whoaremorelikelytohavelowincomes,especiallywiththestagnationofwagesinentry-leveljobs.Creditcardsalsoallowsomeflexibilityintheamountandscheduleofrepayment,which can be particularly attractive to young people who may anticipate higher incomes in the near future than they arecurrently making (Draut, 2006). Minimum payments, however, make it easy for consumers to overspend – especially foryouthwithless experiencehandlingmoney–andsmall purchasescanaddupquickly. Bankshavealsodevelopednewwaystoincreasetheirprofits,withfees,interestratehikes,andaggressivemarketing.Thereiswideconcernthatyoungpeopleareespecially vulnerable to these profit-making tactics because they are less experienced with financial matters (Manning,2000; Draut, 2006; Credit CARD Act of 2009). Making only minimum payments also ensures that the costs of debt increaseeachmonththroughtheadditionoffinancechargesandthusworkstokeepindividualsindebtforincreasinglengthsoftime(ChenandDevaney, 2001). Theincreasedavailabilityofcredit thereforebringspotentiallydangerousrisksof minimumpay-ment traps and ballooning balances. This situation could be extremely damaging for wealth accumulation among youngadults, as future income will for years be used to pay for past purchases.

3. Debt as necessity or improvidence

Despite widespread concern about the social trend of rising personal indebtedness, there has still been strikingly littleresearch on the impact of debt for individual debt-holders. The early ground-breaking work that has been done demon-strates that debt-holding has significant consequences for mental and physical health, but much of this focuses on olderadults (Drentea, 2000; Drentea and Lavrakas, 2000; Sullivan et al., 2000; Jacoby, 2002; Loonin and Plunkett, 2003). Debtmay, however, be particularly consequential for feelings of mastery and self-esteem in young adulthood. The transition toadulthood is an important developmental period for mastery and self-esteem, as youth become increasingly independentand involved in making consequential choices within the opportunities and constraints of their social context (Lewiset al., 1999). Mastery and esteem developed early in life can have long-term effects in their influence on people’s sense of control andcapabilityfor makingfuturedecisions (Reynoldset al., 2007). Researchshowsthat attainment processesandso-cialstressorsaffectmasteryandself-esteem,leadingtodifferentialaccumulationoftheseemotionalresourcesacrossthelifecourse (Thoits, 1995; Mirowsky and Ross, 2007; Reynolds et al., 2007).Theconcept ofdebt asanecessityfor securingthefuturefocusesonhowcreditallowspeopletomovetowardgoalstheircurrentincomecouldnotsupportandcanthusbeavitalinstrumentofstatusattainment.Itiswidelyacceptedthataccesstocredit is a key social good in modern capitalist economies, and lack of access is a significant form of social exclusion (An-thony, 2005;Klawitter and Fletschner, forthcoming). Studies of wealth disparities, housing inequalities, and intergenera- tional mobility argue that expanding access to credit in the 20th century helped build the American middle class, andobstaclestoattainingcreditfordisadvantagedgroups–includingwomen,immigrants, andracialminorities–haveimpededtheir upward mobility (Oliver and Shapiro, 1995; Keister, 2000b; Dwyer, 2007; Akresh, forthcoming).Viewed as an investment in the future, credit is particularly important for young people in the transition to adulthoodbecause they are likely to have lower incomes and relatively few accrued assets to support their aspirations. A college edu-cation is an investment in human capital that is crucial to improving one’s life chances (Attewell and Lavin, 2007; Bowenet al., 2009; Morrisand Western, 1999). It maybe quiterational toencumber futureincomeif takingondebt will ultimatelyresult ina larger incomestream(Friedman, 1957). Educationloans mayalso generatelimitedstress duringthe college yearsas these debts are relatively invisible because they do not demand monthly payments.The reasoning behind an investment interpretation of

credit-card

debt is more complex, but is suggested by informationabout the uses of credit-card debt for young people (Kamenetz, 2006; Manning, 2000). There is a ready exchange betweeneducational debt and credit-card debt as young people ﬁnance their living expenses during college with a combination of student loans and credit-card debt (Sallie Mae, 2009). Colleges are popular locations for credit card marketing because theyprovide credit companies with a constantly replenished population of upwardly-mobile young individuals that they can at-tract as lifelong customers (Manning, 2000). There are other uses of credit-card debt that may also be experienced as forms

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