Financial literacy and mortgage stress

Abstract

This paper examines the effect of financial literacy on mortgage stress. Using data from the Panel Study of Income Dynamics (PSID), we find that borrowers with high levels of financial literacy are over 60 percent less likely to suffer from mortgage stress than borrowers with low levels of financial literacy after controlling for observables. Our findings remain robust to various potential issues, including sample selection bias and functional misspecifications. Moreover, we find that the effect of financial literacy varies across different age groups of borrowers. Further analysis reveals strong cross effects of financial literacy and quantitative reasoning on mortgage stress.