The Impact of the COVID-19 Income Shock on Debt Management: A Mediation Analysis

Abstract

This study uses the 2021 wave of the FINRA National Financial Capability Study dataset to examine the association between large and unexpected income drops experienced by individuals during the COVID-19 pandemic and an individual’s use of stimulus checks to settle debt obligations. This study also examines the mediating role of individuals’ perceived lack of financial control in the association between the large drop in income and the use of stimulus checks for debt payments. The results reveal that over one-third of households allocated their stimulus checks towards debt payments. Notably, individuals experiencing a large and unexpected drop in income had 5.5% higher odds of using pandemic stimulus checks for debt management. Moreover, this relationship was significantly mediated by an individual’s perceived lack of financial control. The findings from this study shed light on the complex associations between experiencing an unexpected and large income reduction, perception of financial control, and debt management decisions of individuals. The significant role of perceived financial control in describing individuals’ debt management decisions found in this study suggests that perceived control is not just a reflection of a household’s financial situation but also a determinant of their financial decision-making in times of crisis. Furthermore, the results underscore the critical role of stimulus checks and other financial assistance in mitigating the economic impacts of the pandemic on American households. Findings from this study contribute to a deeper understanding of financial decision-making processes during periods of economic uncertainty and offer implications for future economic policies and financial literacy programs.