Financial Capability and Informal Bankruptcy: Comparing Student Loan Holders and Non-Holders

Yao, R. and Xiao, J.J. (2022), "Financial capability and informal bankruptcy: comparing student loan holders and non-holders", International Journal of Bank Marketing, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJBM-05-2022-0207

34 Pages Posted: 18 Oct 2022

See all articles by Rui Yao

Rui Yao

University of Missouri at Columbia - Department of Personal Finance Planning

Jing Jian Xiao

University of Rhode Island

Multiple version iconThere are 2 versions of this paper

Date Written: September 26, 2022

Abstract

Purpose: The 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/approach: US 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.

Findings: Generally, 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/implications: First, cross-sectional data cannot establish a causal relationship. Second, findings using data from a single country may not be generalized to other countries.

Practical implications: Financial 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/value: This 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.

Keywords: Bankruptcy, debt delinquency, financial capability, insolvency, informal bankruptcy, student loan

Suggested Citation

Yao, Rui and Xiao, Jing Jian, Financial Capability and Informal Bankruptcy: Comparing Student Loan Holders and Non-Holders (September 26, 2022). Yao, R. and Xiao, J.J. (2022), "Financial capability and informal bankruptcy: comparing student loan holders and non-holders", International Journal of Bank Marketing, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJBM-05-2022-0207, Available at SSRN: https://ssrn.com/abstract=4230471 or http://dx.doi.org/10.2139/ssrn.4230471

Rui Yao (Contact Author)

University of Missouri at Columbia - Department of Personal Finance Planning ( email )

239 Stanley Hall
Columbia, MO 65211-7700
United States
573-882-9343 (Phone)
573-884-8389 (Fax)

HOME PAGE: http://pfp.missouri.edu/faculty_yao.html

Jing Jian Xiao

University of Rhode Island ( email )

Transition Center
Kingston, RI 02881
United States
401-874-2547 (Phone)
401-874-4020 (Fax)

HOME PAGE: http://www.uri.edu/hss/hdf/faculty/JingJXiao.htm

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
35
Abstract Views
300
PlumX Metrics