Abstract
This dissertation examines the relationship between cost-of-living pressures and borrowing behaviour among young adults, with particular focus on how these dynamics influence default risk. Drawing upon a systematic synthesis of peer-reviewed literature spanning multiple decades and national contexts, this study analyses how escalating housing, education, and general living costs have fundamentally transformed the financial behaviours of younger generations. The findings reveal that contemporary young adults carry substantially larger debt burdens relative to income compared with previous cohorts, with a marked shift toward unsecured and student debt rather than traditional mortgage borrowing. This research demonstrates that debt has transitioned from an exceptional financial tool to a routine mechanism for achieving standard life milestones and maintaining basic social participation. Crucially, the analysis identifies that elevated leverage, combined with unstable early-career incomes, significantly increases the likelihood of repayment difficulty, delinquency, and default, particularly among financially vulnerable subgroups including low-income and less-educated young adults. The dissertation concludes by identifying policy implications and recommending targeted interventions to address the growing financial fragility within this demographic cohort.
Introduction
The financial landscape confronting young adults in contemporary society bears little resemblance to that experienced by previous generations. Over recent decades, a confluence of structural economic changes has fundamentally altered the pathways through which young people transition to independent adulthood. Chief among these changes are dramatic increases in housing costs, the expansion and rising expense of higher education, and broader cost-of-living pressures that have outpaced wage growth, particularly for entry-level positions typically occupied by younger workers (Houle, 2014).
These economic pressures have profound implications for borrowing behaviour. Where previous generations might have viewed debt primarily as a mechanism for major asset acquisition, contemporary young adults increasingly rely upon borrowing to finance education, secure housing, and maintain basic social participation. This normalisation of debt represents a significant cultural and economic shift, transforming financial obligations from exceptional circumstances into routine features of early adult life (Montgomerie, 2013).
The academic significance of this topic extends across multiple disciplines. Economists study the implications for household balance sheets and macroeconomic stability. Sociologists examine how debt reshapes life course transitions and perpetuates inequality. Psychologists investigate the mental health consequences of financial strain, whilst policy scholars consider regulatory and welfare responses to growing financial precarity among young populations.
The practical importance of understanding these dynamics cannot be overstated. Young adults experiencing financial difficulties face immediate consequences including stress, anxiety, and constrained life choices. However, the ramifications extend far beyond individual hardship. High levels of youth indebtedness and default risk carry systemic implications for financial institutions, housing markets, and broader economic stability. Furthermore, the concentration of financial vulnerability among particular demographic subgroups raises significant equity concerns, as debt burdens may entrench and exacerbate existing socioeconomic inequalities (Dwyer and DeMarco, 2024).
This dissertation addresses these concerns through a comprehensive examination of how cost-of-living pressures influence borrowing behaviour and default risk among young adults. By synthesising evidence from diverse academic sources, this study aims to provide a nuanced understanding of the mechanisms through which economic pressures translate into changed financial behaviours, and ultimately, into elevated default risk for vulnerable populations.
Aim and objectives
The primary aim of this dissertation is to critically examine the relationship between cost-of-living pressures and borrowing behaviour among young adults, with particular attention to how these dynamics influence default risk across different demographic subgroups.
To achieve this aim, the following specific objectives guide the research:
1. To analyse the historical evolution of young adult debt patterns across cohorts, identifying key shifts in the composition and magnitude of borrowing.
2. To examine the mechanisms through which rising housing, education, and living costs influence young adults’ decisions to borrow and their choice of credit products.
3. To identify the behavioural and psychological factors that mediate the relationship between cost pressures and borrowing decisions among young adults.
4. To evaluate the determinants of default risk among young adult borrowers, with particular focus on the role of debt-to-income ratios, employment instability, and demographic characteristics.
5. To assess the broader consequences of debt-related financial strain for young adults, including impacts on housing transitions, mental health, and life course progression.
6. To identify policy-relevant implications and potential interventions to address elevated borrowing and default risk among financially vulnerable young adults.
Methodology
This dissertation employs a systematic literature synthesis methodology to address the stated research objectives. This approach is particularly appropriate given the breadth of the research questions and the existence of a substantial body of high-quality empirical research addressing various aspects of young adult borrowing and default risk.
The literature synthesis involved a structured search and review process. Initial source identification utilised academic databases including JSTOR, Web of Science, and Google Scholar, supplemented by targeted searches of relevant peer-reviewed journals in economics, sociology, and consumer finance. Search terms included combinations of “young adults,” “borrowing behaviour,” “debt,” “default risk,” “cost of living,” “housing costs,” “student loans,” and related terminology.
Sources were selected based on rigorous quality criteria. Inclusion was limited to peer-reviewed journal articles, working papers from recognised academic institutions, and publications from reputable governmental and international organisations. Particular emphasis was placed on empirical studies employing robust methodological approaches, including longitudinal analyses tracking cohort changes in debt patterns, econometric studies examining determinants of borrowing and default, and qualitative investigations exploring the lived experiences of indebted young adults.
The synthesis process involved systematic extraction of key findings, critical evaluation of methodological approaches and limitations, and thematic organisation of evidence to address each research objective. Where studies employed different national contexts or time periods, attention was given to identifying both consistent patterns and context-specific variations.
This methodological approach enables comprehensive coverage of a multifaceted topic whilst maintaining analytical rigour. The synthesis of diverse evidence sources permits identification of robust findings that emerge across multiple studies and contexts, whilst also highlighting areas of uncertainty or disagreement requiring further investigation.
Literature review
The transformation of young adult debt patterns
The debt landscape confronting contemporary young adults differs markedly from that experienced by previous generations. Houle (2014) provides compelling evidence of this transformation through analysis of debt patterns across three cohorts of American young adults. This research demonstrates that across cohorts since the 1970s, young adults have come to carry substantially larger debt burdens relative to their incomes. Critically, the composition of this debt has shifted dramatically, with increasing proportions represented by unsecured debt and student loans rather than traditional mortgage borrowing.
This shift reflects fundamental changes in the role debt plays in young people’s lives. Where borrowing was once primarily associated with major asset acquisition, particularly homeownership, contemporary young adults increasingly utilise debt as a routine tool for achieving basic life milestones and maintaining social participation. Pérez-Roa and Ayala (2020) document this phenomenon in their qualitative study of indebted young professionals in Santiago de Chile, revealing how debt has become integral to educational attainment and entry into professional employment. Their research characterises this situation as representing “new economic insecurities” facing young adults transitioning to adulthood with significant financial obligations.
Dwyer and DeMarco (2024) extend this analysis by examining how debt accumulation varies across educational attainment, race, and ethnicity. Their findings reveal that the burden of emerging adult debt is distributed unequally, with patterns that may serve to entrench and exacerbate existing socioeconomic inequalities. This research underscores the importance of disaggregated analysis when examining young adult borrowing patterns, as aggregate trends may obscure significant variation across demographic subgroups.
Housing costs and borrowing decisions
Rising housing costs represent a particularly significant pressure on young adult finances and borrowing behaviour. In expensive housing markets, young adults seeking homeownership must borrow larger multiples of income to enter the market, often leveraging heavily relative to their current earnings and expected income growth. Martins and Villanueva (2009) examine this dynamic in their study of why young adults live with their parents, finding that high mortgage debt costs significantly influence housing transitions. Their research demonstrates that when credit is expensive, young adults may delay household formation or accept lower housing quality rather than taking on burdensome mortgage debt.
Montgomerie (2013) provides a broader contextual analysis of these dynamics in the American context, examining how debt has become embedded in what she terms the “debt safety-net.” This analysis reveals how borrowing has come to substitute for inadequate social provision, with young adults and others using credit to bridge gaps in housing affordability, healthcare access, and income stability. This transformation has particular implications for young adults, who face both elevated housing costs and typically lower incomes than more established workers.
The behavioural responses to housing cost pressures vary with credit conditions. Durguner (2020) examines how relaxed lending standards influenced household debt and borrowing behaviours in the period preceding the 2007 mortgage crisis. This research demonstrates that when credit is cheap and readily available, young adults and others tend to take on more and larger loans. However, when mortgage costs rise or lending standards tighten, behavioural adjustments include delayed household formation and downgraded housing quality expectations.
Education costs and student debt
The expansion of higher education participation, combined with rising tuition fees and reduced public subsidies, has made student debt a defining feature of contemporary young adulthood in many countries. Sinha et al. (2025) examine the financial behaviours and characteristics of emerging and young adult student loan borrowers, revealing patterns of borrowing that reflect both investment motivations and financial necessity.
The consequences of student debt extend well beyond the repayment period. Walsemann, Gee and Gentile (2014) demonstrate significant associations between student borrowing and mental health outcomes among young adults in the United States. Their research finds that those carrying student debt report poorer psychological wellbeing, with effects that persist even when controlling for other demographic and economic characteristics. This finding suggests that the stress associated with educational debt has meaningful impacts on young adult health and functioning.
Student debt also influences major life decisions and transitions. Napolitano et al. (2021) examine how postsecondary debt affects marriage plans among young adults who came of age during the Great Recession. Their qualitative research reveals how debt obligations lead young people to delay or reconsider marriage, with participants describing timelines for major life milestones as extending “longer than I would’ve originally liked and originally thought.” This evidence illustrates how educational debt can ripple through multiple domains of young adult life, shaping expectations and constraining choices.
Borrowing for everyday needs
Beyond housing and education, young adults increasingly utilise debt to cover shortfalls in everyday living expenses and maintain social participation. Pérez-Roa and Ayala (2020) document how indebted young professionals use borrowing to manage periods of unemployment, health costs, and basic consumption needs. This pattern represents a departure from traditional conceptions of consumer borrowing as primarily financing discretionary purchases or major investments.
Madeira (2023) examines these dynamics in the Chilean consumer debt market, finding that borrowing to cover everyday needs reflects both structural economic pressures and individual circumstances. The research identifies adverse selection patterns in consumer lending, with those facing greatest financial pressure often accessing credit on the least favourable terms.
Behavioural and psychological factors in borrowing decisions
Understanding why young adults borrow requires attention to psychological and behavioural factors beyond purely economic considerations. Gärling, Michaelsen and Gamble (2020) examine how present-biased temporal discounting influences young adults’ borrowing to purchase desired consumer products. Their research finds that individuals with stronger present-biased preferences and feelings of financial deficit show greater likelihood of borrowing for desired goods, including those that might be considered non-essential.
Hansen (2025) extends this analysis by examining what constitutes “risky borrowing tendencies” among young adults. This research identifies how social norms and financial trust influence willingness to utilise high-cost credit products, with young adults who possess limited financial buffers showing particular vulnerability to risky borrowing decisions.
These behavioural findings have important implications for understanding default risk. If borrowing decisions are influenced by present-biased preferences or social pressures rather than careful assessment of repayment capacity, the likelihood of subsequent repayment difficulty increases. This suggests that interventions focused purely on credit access or interest rates may prove insufficient without complementary attention to decision-making processes.
Determinants of default risk
The elevated borrowing among young adults raises critical questions about default risk. Madeira (2023) provides comprehensive analysis of default determinants in the Chilean consumer debt market, identifying that default risk rises with high debt-to-income ratios, unemployment risk, and household size, whilst falling with higher income, education, and age. These findings suggest that young adults face elevated baseline default risk due to their typically lower incomes, less stable employment, and shorter credit histories.
Dettling and Hsu (2014) examine the relationship between debt and parental co-residence among young adults, finding that those with higher debt levels show greater likelihood of moving back in with parents. Critically, their research demonstrates that delinquency and low credit scores lengthen time in co-residence, evidencing how financial strain translates into constrained housing options and delayed independence. This pattern suggests that default and delinquency have consequences extending well beyond immediate financial penalties.
Consequences for wellbeing and life course progression
The financial strain associated with elevated borrowing and default risk has documented consequences for young adult wellbeing. Fan and Ryu (2023) apply an adaptation of the stress process model to examine relationships between financial debts and subjective wellbeing among young adults. Their research confirms significant negative associations between debt burdens and various wellbeing measures, consistent with the broader literature on financial stress and mental health.
These wellbeing impacts interact with life course progression in complex ways. Young adults experiencing debt-related anxiety may delay or forgo major life transitions including marriage, homeownership, and parenthood. This delay can have cascading consequences for subsequent life stages and may contribute to broader demographic trends including delayed family formation observed in many developed economies.
Discussion
The evidence synthesised in this dissertation reveals a coherent and concerning picture of how cost-of-living pressures reshape borrowing behaviour and elevate default risk among young adults. This discussion critically analyses the key findings and their implications, addressing each of the stated research objectives.
The normalisation of debt in early adulthood
A central finding emerging from this literature synthesis is that debt has become normalised as a routine feature of young adult life rather than an exceptional financial tool. The cohort analyses conducted by Houle (2014) demonstrate that this normalisation represents a genuine historical shift rather than simply a life-stage phenomenon. Contemporary young adults carry substantially larger debt burdens than their predecessors did at equivalent ages, suggesting structural changes in the relationship between young people and credit markets.
This normalisation has complex implications. On one hand, access to credit enables young adults to invest in education and housing despite limited current resources, potentially facilitating upward mobility. On the other hand, the routine use of debt to finance basic participation and bridge income shortfalls raises concerns about financial resilience and the sustainability of consumption patterns dependent upon continued borrowing.
The shift toward unsecured debt and student loans rather than mortgage borrowing is particularly significant. Traditional mortgage debt, whilst representing financial obligation, simultaneously builds equity in an appreciating asset. In contrast, student loans finance human capital investment with uncertain returns, whilst consumer debt often finances depreciating goods or temporary consumption. The changing composition of young adult debt thus represents not merely increased borrowing but qualitatively different financial obligations with distinct risk profiles.
Mechanisms linking cost pressures to borrowing
The evidence identifies multiple mechanisms through which rising costs translate into increased borrowing among young adults. Direct mechanisms include the necessity of financing education through loans when tuition exceeds available resources, and the requirement for larger mortgages when housing prices rise faster than incomes. These direct mechanisms reflect straightforward responses to changed price ratios between desired goods and available resources.
However, indirect mechanisms prove equally important. The use of debt to cover everyday shortfalls and maintain social participation documented by Pérez-Roa and Ayala (2020) and Montgomerie (2013) suggests that cost pressures operate not only through specific major purchases but through general erosion of financial buffers. When routine expenses consume available income, any unexpected need or desired purchase requires borrowing, creating patterns of debt accumulation that may prove difficult to reverse.
Behavioural mechanisms further complicate this picture. The research by Gärling, Michaelsen and Gamble (2020) on present-biased preferences suggests that psychological factors influence borrowing decisions in ways that may not align with long-term financial wellbeing. Young adults experiencing feelings of financial deficit may be particularly susceptible to borrowing for immediate consumption, even when such borrowing increases future financial strain.
Differential vulnerability to default risk
The determinants of default risk identified in the literature reveal significant heterogeneity in vulnerability across young adult subgroups. The findings from Madeira (2023) that default risk rises with high debt-to-income ratios and unemployment risk whilst falling with income and education suggest that economically disadvantaged young adults face compounded risks. Not only do they experience greater pressure to borrow to meet basic needs, but they also face elevated probability of repayment difficulty when borrowing occurs.
The research by Dwyer and DeMarco (2024) on unequal debt patterns across education, race, and ethnicity reinforces this concern. If debt burdens concentrate among already disadvantaged groups, the consequences of default may serve to entrench and exacerbate existing inequalities. Young adults who experience default face damaged credit scores, reduced access to future borrowing, and potential legal and employment consequences that can persist for years.
The evidence on parental co-residence from Dettling and Hsu (2014) illustrates how default and delinquency translate into constrained life options. Young adults forced to return to parental homes due to financial difficulties experience delayed transitions to independent adulthood, with potential cascading effects on relationship formation, career development, and subsequent financial trajectories.
Implications for policy and practice
These findings carry significant implications for policy and practice. The concentration of default risk among economically vulnerable young adults suggests need for targeted interventions addressing both prevention and mitigation.
Preventive interventions might include enhanced financial education equipping young adults to make informed borrowing decisions, though the evidence on present-biased preferences cautions against assuming that information alone will change behaviour. Structural interventions addressing underlying cost pressures, including housing affordability and education financing, may prove more effective than approaches focused solely on individual decision-making.
Regulatory attention to lending practices affecting young adults appears warranted, particularly regarding high-cost credit products that may be marketed to those with limited financial buffers. The research by Hansen (2025) on risky borrowing tendencies suggests that social norms and financial trust influence uptake of such products, indicating potential roles for both regulation and public communication campaigns.
For those already experiencing debt-related difficulties, the evidence on mental health consequences from Walsemann, Gee and Gentile (2014) and Fan and Ryu (2023) suggests need for recognition of debt as a health determinant. Integration of financial counselling with mental health services, and vice versa, may address the intertwined nature of financial and psychological distress among indebted young adults.
Limitations and areas requiring further research
Whilst the synthesised evidence provides substantial insight into young adult borrowing and default risk, important limitations warrant acknowledgement. Much of the available research derives from specific national contexts, particularly the United States and Chile, raising questions about generalisability to other settings with different credit markets, welfare systems, and cultural orientations toward debt.
The causal mechanisms linking cost pressures, borrowing, and default remain incompletely understood. Whilst the associations documented in the literature are robust, the complex interplay of structural economic factors, institutional contexts, and individual characteristics makes definitive causal claims difficult. Longitudinal research tracking individuals over extended periods would strengthen causal inference.
The rapid evolution of credit markets, including the growth of financial technology and alternative lending products, may alter the dynamics documented in existing research. Young adults today access credit through channels that did not exist when much of the reviewed research was conducted, with uncertain implications for borrowing patterns and default risk.
Conclusions
This dissertation has examined how cost-of-living pressures change borrowing behaviour and default risk among young adults, synthesising evidence from a substantial body of peer-reviewed research. The analysis reveals that rising housing, education, and general living costs have fundamentally transformed the financial behaviours and obligations of contemporary young adults relative to previous generations.
Regarding the first objective, the analysis confirms that young adults across successive cohorts carry substantially larger debt burdens relative to income, with a marked shift in composition toward unsecured and student debt rather than traditional mortgage borrowing. This represents a genuine historical transformation rather than simply a life-stage phenomenon.
Addressing the second objective, the evidence identifies multiple mechanisms through which rising costs influence borrowing decisions, including direct necessity financing of education and housing, indirect erosion of financial buffers requiring borrowing for routine needs, and behavioural responses to feelings of financial deficit.
The third objective, concerning behavioural and psychological factors, is addressed through evidence demonstrating how present-biased preferences, social norms, and financial trust influence young adults’ borrowing decisions in ways that may increase subsequent default risk.
The fourth objective, evaluating determinants of default risk, is met through synthesis of evidence identifying high debt-to-income ratios, unemployment risk, and limited education as key risk factors, whilst higher income and age serve as protective factors.
The fifth objective, assessing broader consequences of debt-related financial strain, is addressed through evidence linking debt burdens to parental co-residence, delayed life transitions, and adverse mental health outcomes among young adults.
Finally, regarding policy implications identified under the sixth objective, the findings suggest need for multifaceted approaches including enhanced financial education, structural interventions addressing underlying cost pressures, regulatory attention to lending practices affecting vulnerable young adults, and integration of financial and mental health support services.
The significance of these findings extends across academic, policy, and practical domains. Academically, the evidence contributes to understanding of how structural economic changes reshape individual financial behaviours and life course transitions. For policy, the concentration of default risk among already disadvantaged young adults raises equity concerns requiring targeted intervention. Practically, the findings highlight the importance of recognising debt as a significant determinant of young adult wellbeing requiring attention across multiple service domains.
Future research should address the limitations identified in this dissertation, including the need for more diverse national contexts, stronger causal evidence, and attention to rapidly evolving credit market structures. Longitudinal studies tracking young adult cohorts over extended periods would prove particularly valuable for understanding how early borrowing patterns influence subsequent financial trajectories and life outcomes. Additionally, intervention research evaluating the effectiveness of different policy approaches to addressing young adult debt and default risk would provide crucial evidence for practice.
The transformation of debt from exceptional tool to routine feature of young adult life represents one of the most significant financial changes affecting recent generations. Understanding and addressing the consequences of this transformation, particularly for the most vulnerable young adults, constitutes an urgent priority for research, policy, and practice.
References
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