If Money Can Make You Happy, Does Debt Make You Sad?

Humans have long debated the adage ‘Money can’t buy you happiness.’ Popular opinion suggests that, indeed, it cannot, but more recently researchers have challenged this notion. Based on extensive studies, investigators found that money, or income, can contribute to your happiness. In our capitalist society, income leads to increases in happiness to the extent that funds are required to attain the things that lead to happiness. By meeting needs for shelter or food, allowing the purchase of a home or groceries, or opening the window to experiences such as adventure or travel, money can increase our sense of satisfaction with life.

But what about the relationship between debt and wellbeing? Does money, even when borrowed, make us happier – or does the state of owing money add to our dissatisfaction and stress? The ‘IOU’ is an ever-present and, at times, necessary evil that allows for a degree on the wall, a roof overhead, or a shiny car in the garage. Yet at what cost?

For my colleagues and I, the emotional impact of borrowing certainly merited study, given that 80 per cent of US households, and 70 per cent of college graduates, are currently in debt. A review of prior studies showed that stress from debt was two-pronged: it appeared to spill over and add to the psychological burden of life, but it was also a real drain on the actual resources required to pay off the debt.

To drill down deeper, our team analysed a large sample of college students and the impact of their student loans on subjective wellbeing. Much of what we found seemed self-evident: if a debt felt manageable, it was less damaging to an individual’s sense of wellbeing than if the debt felt overwhelming. A person’s sense of wellbeing varied with the source of the borrowed funds. Money borrowed from people or places charging less interest or offering more flexibility – subsidised student loans, for instance – results in less stress than money borrowed from financial institutions with exorbitant interest rates and no forgiveness policies. The emotional toll taken by debt varied with the degree to which an individual had other financial resources. A person whose debt was matched by investments or property had a security blanket to help them through. Especially important was the raison d’être for the loan. Debt undertaken for necessities, such as a home to live in, was less detrimental to one’s wellbeing; debt undertaken for an irresponsible splurge on unnecessary home renovations was more stressful.

So, is education debt less upsetting because it leads to levels of attainment necessary for many careers? Only to a certain degree. Unsurprisingly, our analyses showed that student loans lead to greater financial worry, which has a detrimental effect on life satisfaction. But the more that education led to real income, the less anxiety the borrower felt. We found that as students continued to pay out their debt over the course of up to eight years, happiness was reliably boosted by income and diminished by debt, until the two balanced out.

Is there any benefit to such studies, which seem to bear out the obvious? We think so.

When considering the issue of whether debt or income have stronger effects on the sense of wellbeing, it is helpful to understand whether income is merely the opposite of debt. After all, if debt and income are two poles of a unidimensional continuum, then comparing their relative strengths will not be substantively meaningful. But our team found an interesting juxtaposition between debt and income, and a far more nuanced relationship between the two: debt levels can accrue regardless of income levels. In fact, individuals who have higher levels of income also have access to higher credit and can incur higher debt. On the other hand, individuals who are financially competent will likely have higher levels of income and lower levels of debt – and this leads to an inverse relation between the two and the sense of wellbeing they provoke.

What appears simple, therefore, is somewhat complex. Our findings emphasise that students shouldn’t worry only about their credit scores when accruing large amounts of debt; erosion of the sense wellbeing and inner emotional life must be weighed as well. Students should understand, moreover, that not all debt has an equal impact. If you choose to carry some debt, a few considerations are key: only borrow what you can manage. Think hard about why you are borrowing the money and where it is coming from. And borrow only if you can back up the debt with income or other assets. If you consider these factors, then debt need not wipe that smile off your face.