The economic crisis of 2008 called attention to the risks associated with rising household and consumer debt. Over the last forty years, inflation adjusted household debt has increased dramatically, and debt has become more difficult to repay for American families. The ability to borrow is a significant resource for investing in human capital, purchasing goods and services, and smoothing consumption. In some circumstances, however, repaying debt (or pressure to do so) may result in economic or other stress and, potentially, reduced consumption and wellbeing. Whereas prior research has found debt burden to be correlated with stress, poor marital relationship quality, and poor health and mental health for adults, few studies have investigated whether debt is associated with other aspects of family life that are crucial to health and wellbeing, including parenting behaviors and child development. Furthermore, prior studies have predominantly used data and methodologies that are likely to yield biased estimates. That is, they have been unable to adequately adjust for selection bias or rule out the possibility of reverse causality.

To begin to address these gaps, this study uses an instrumental variables strategy to estimate associations between particular types and amounts of parental debt with child cognitive skills and social-emotional development. The data are drawn from the 1986 through 2011 waves of the mother and child files of the 1979 panel of the National Longitudinal Survey of Youth (NLSY), which have been linked to a unique dataset of state-by-year consumer financial protection policies. The policy data include information on homestead exemption levels, usury caps/criminal usury laws, payday lending laws, debt collection practices, average housing prices, mortgage interest rates, home foreclosure rates, and college prices, each of which is likely to influence debt accumulation. These data are used to predict household level home mortgage debt, educational debt, and unsecured debt. The predicted debt amounts in each category—which represent exogenous variation in debt due to state and year level differences in consumer financial protection policies—are then used to estimate unbiased effects of debt on child cognitive skills and social-emotional development. Cognitive skills are measured by the Peabody Individual Achievement Test. Social-emotional development is measured by the internalizing and externalizing behaviors subscales of the Behavioral Problems Index.

There have been considerable regulatory reforms in laws governing mortgages and revolving (largely credit card) debt in recent years, as well as considerable state-level legislation addressing predatory or subprime lending. Postsecondary education prices have also increased at a much faster rate than inflation. This research has the potential to generate important implications regarding the ways in which consumer financial protection legislation may affect parental debt and, thereby, child wellbeing. As such, it may provide crucial information for policymakers attempting to consider the full range of potential costs and benefits of such regulation.