Many borrowers might feel like they’re bound to their debts for the rest of their lives. It turns out that the effects of carrying debt could last even longer than that — potentially weighing on your descendants for generations to come.
A 2016 study found that, on average, as parents take on more debt, their children tend to become worse off in terms of their socio-emotional well-being. And considering the meteoric rise of household debt in recent years (as of March 2017, total household indebtedness is up to about $12.7 trillion, $50 billion above its 2008 peak, according to the Federal Reserve Bank of New York), this issue is concerning for the many families it stands to affect, along with American society at large.
“We need to think beyond just what debt means individually and think about what it means for family well-being more generally,” says Jason Houle, assistant professor of sociology at Dartmouth College and co-author of the study.
Digging deeper into the debt details, Houle and his study co-author Lawrence Berger, a professor at the University of Wisconsin–Madison’s School of Social Work, found that the type of debt makes a big difference. When parents took on or increased their home or education debt, it seemed to have a positive effect on their children’s well-being. On the other hand, additional unsecured debt — which includes credit card debt, medical debt, payday loans and loans from family and friends — tended to coincide with more behavioral problems.
[See: 8 Financial Steps to Take After Paying Off a Debt.]
These results can in part be explained by why people take on each type of debt and what those reasons indicate about a family’s overall financial situation. For example, a family’s budget would typically have to be in decent shape in order for it to even qualify for a mortgage. Also, “buying a home may allow you to live in a better neighborhood, stay in one place for longer periods of time — so there’s more residential stability — and for your kids to attend better schools,” Berger says. “All of those things may play out well for child development.”
So clearly, debt in general is not the problem. “We often tend to lump all kinds of debt together and see it as equally ‘bad,'” says Megan Ford, a financial therapist at the University of Georgia and president of the Financial Therapy Association, in an email. “The reality is that when debt is effectively and responsibly utilized as a tool, it can be a worthwhile financial strategy.” For example, she notes “buying a home in a good neighborhood; purchasing a safe, reliable automobile; going back to school to acquire additional education and skills; using a credit card to build a better credit score” as positive ways to use debt.
But debt’s bad reputation doesn’t come out of nowhere. Many loans, especially with credit cards, come with very high interest rates. For example, some retail credit cards charge interest rates of more than 20 percent. Such terms can easily lead happily swiping shoppers to get in over their heads if they spend more than they can afford and wind up carrying a balance.
So it pays to approach debt with care when possible. “If you’re going to take on debt, really try to think, ‘Is this something worth borrowing for? Do I have the choice? Do I have a plan for how to pay it back? Is there a way to limit the implicit cost of that debt?'” Berger says.
[See: 10 Easy Ways to Pay Off Debt.]
Of course, whether you take on debt isn’t always easy to avoid or plan for. If you’re having a hard time financially or dealing with some medical issue, you may need to take on credit card or medical debt to stay afloat. That kind of difficulty can cause parents stress and anxiety, “creating a strain in the family, which can trickle down to how you talk to your kid or to your parenting behaviors,” Houle says. “Kids can sense when things aren’t going well in the household, financially or otherwise.”
How can you limit the potential negative effects that this kind of debt might have on your children? Try to remain calm.
“The family’s financial situation, in some ways, matters less than how money is discussed or dealt with,” Ford says. She explains that if parents are stressing over debt, the children can absorb that stress and carry it with them for the long term. “What we experienced growing up and what the people who raised us taught us about money contribute to who we become with money as an adult,” she says.
Keeping calm is easier said than done. What can help is educating yourself about your own debt situation, as well as personal finance topics in general. Understanding this subject matter can better equip you to create a repayment plan and take control of your whole financial picture. Plus, in order to discuss financial matters with your children, you ought to be well-versed on the subject yourself first, if only to ensure that you’re able to pass on accurate financial information.
[Read: No Savings, No Backup Plan, No Fairy Godmother: How to Handle a Financial Disaster.]
Bonus: Openly discussing debt and other financial matters with your children may be the first step to destigmatizing debt and money for our society.
“Talking with kids about money in a way that’s healthy and informative breaks this cycle of money talk as taboo, rude or unacceptable,” Ford says. “We need a better comfort level with money talk — the good, the bad and the ugly — as a broader culture, and since we garner so much from our home environments and upbringings, parents are well-positioned to lead this effort.”
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How Debt May Be Affecting Your Kids originally appeared on usnews.com
