UNDERSTANDING THE USE OF FORMAL DEBT AMONG GENERATION Z

UNDERGRADUATES: THE IMPACT OF PERCEIVED DEBT SENSITIVITY

Nguyen Hoang Ngoc, Le Huong Thao, Mai Xuan Phong, Pham Mai Trang, Hoang Thi
Thao Nguyen
Abstract
In the rapidly evolving financial landscape, understanding the behavior of
young consumers, particularly Generation Z undergraduates, towards formal debt
usage is crucial. This research paper delves into the understanding of formal debt
usage among Generation Z undergraduates in Vietnam, with a particular focus on the
impact of perceived debt sensitivity. The study employs the SEM model and various
microeconomic theories to establish a theoretical framework of the factors influencing
this demographic’s intention to use formal debt. Data collected from the sample of 406
valid responses reveal that while self-assessment positively impacts formal debt usage,
debt sensitivity, financial literacy, and certain personal characteristics have a negative
influence. Individuals who are more sensitive to their debt levels are less likely to use
formal debt instruments. The paper concludes with recommendations for both
Generation Z undergraduates and financial institutions to adapt to the evolving
financial landscape. The need for future research to further explore the complexity of
consumer behavior and its implications for Vietnam’s financial market development is
also emphasized.
Introduction
Generation Z, born between the mid-1990s and early 2010s, constitutes a
significant portion of today's student population. As undergraduates, they grapple with
the dual challenges of education and financial stability. Despite their financial
constraints, Gen Z students exhibit a surprisingly tolerant attitude toward debt, as the
prospect of higher future earnings after completing education justifies their willingness
to incur debt. Over one-third of Gen Z individuals, particularly those aged 20 to 25,
carry student debt. Research indicates that the average outstanding loan balance for a
Gen Z student borrower is $24,473, surpassing millennials' debt at a similar life stage.
There exists, however, an interesting feature: tech-savvy Gen Z undergraduates,
constrained by age and income, choose to embrace Buy-Now-Pay-Later (BNPL)
schemes as a formal debt tool. Particularly in Vietnam, a remarkable 85% of young
individuals have adopted BNPL, yet 35% have faced repayment defaults.
The use of BNPL, a type of formal debt instrument, shares some common
characteristics with the use of credit cards. Personality traits, ethical judgments, credit
availability, and financial literacy influence credit card behavior. Debt attitude and
labeling effect also serve as key drivers. Debt attitude reflects comfort with debt, while
the labeling effect considers the stigma associated with being labeled a debtor.
Integrating these aspects into "perceived debt sensitivity," this research aims to explore
its impact on BNPL usage and formal debt among Gen Z undergraduates.
Formal debt is financial obligations incurred through borrowing from regulated
institutions like banks and credit unions (Mai Ahmed Abdelzaher, 2019) . It is
characterized by legally binding agreements and is often recorded in official financial
systems. Formal debt offers advantages like consumer protection laws, access to larger
sums of money, and creditworthiness building. It plays a crucial role in personal
financial growth and economic development. In Vietnam, formal debt instruments are
evolving to meet younger generations' needs, as their optimism about their future may
influence their willingness to engage with formal financial products.
 BNPL services are influenced by factors like financial literacy, "pain of
paying," and convenience. Mobile-friendly customers are more likely to use BNPL
services. These innovative payment models revolutionize retail and online shopping,
allowing immediate purchases without upfront payment. However, BNPL may reduce
consumers' sensitivity to prices, potentially reducing future financial flexibility.
Further research is needed to understand its impact on spending patterns and economic
outcomes.
Until now, there has not been a specific and accurate definition of debt
sensitivity. As specifically applied to a scientific instrument or measurement, the
adjective “sensitive” is defined by the Oxford English Dictionary (OED)2 as:
“Indicating slight changes of condition, easily moved or affected by the external forces
which it is constructed to detect or record.” Therefore, the term " debt sensitivity", also
known as performance-sensitive debt, refers to an entity's financial condition's
response to changes in its debt level, indicating its financial health vulnerability.
Perceived debt sensitivity refers to individuals' subjective awareness and sensitivity to
their debt levels, influencing their actions and decision-making processes. It influences
how they manage debt responsibilities, take on new debt, and plan for financial
stability. This perspective is crucial for financial resilience and well-being.
Debt sensitivity can be indirectly measured through debt attitudes, behavior,
and aversion, which is measured through the labeling effect. Calem and Mester (1995)
has found that general attitudes towards borrowing and borrowing for specific items
are positively related to consumer debt. The labeling effect, a subfield in psychology,
can help understand a person's aversion to debt. It can also be used to measure the
level of debt aversion to the word "loan" or "debt".
The following sections of this paper would delve into the intricacy of factors
determining use of debt and debt attitude proposed by established researchers. Then
comes the hypotheses of this research as well as the research methodology, results, and
further discussion. Recommendations are highlighted at the end of the paper.
Literature Review and Hypothesis development
Low financial literacy is linked to higher debt problems and higher loan costs.
Research by Agarwal, Driscoll, Gabaix, and Laibson (2008) shows that those with
better knowledge about credit cards make better choices on loans. Higher financial
literacy is associated with higher debt sensitivity. Students with higher financial
literacy are more likely to pay their balance in full each month and own fewer credit
cards. Additionally, higher financial literacy is related to perception of the benefits and
risks of BNPL and the perceived riskiness of BNPL (Chen and Volpe, 1998). This
relationship suggests that financial literacy is crucial for reducing debt and improving
financial outcomes.
The study by Lusardi and Tufano (2015) found that self-reported financial knowledge
is strongly correlated to self-assessed debt burdens. Mudzingiri, Mwamba, and Keyser
(2018) found that financial behavior of university students is influenced by confidence,
risk preferences, and financial literacy perceptions. Financial self-confidence plays a
vital role in personal debt, credit card usage, and financial planning. Studies have
shown that financial self-efficacy can limit irrational spending, decrease household
debt, and help curb risk and credit behavior. The study also uses a five-point Likert
scale to test self-assessment/self-efficacy in finance.
Prepayment is the tendency to pay for products or services before consumption,
a concept introduced by Prelec and Loewenstein (1998). This preference is influenced
by discomfort when making a payment while forgoing the utility of consumption.
Consumers often prefer to pay in advance to mitigate this discomfort and create an
illusion of free consumption. However, consumption experience can vary based on the
product type and durability. Time discounting influences consumers' decisions
regarding saving and borrowing, leading to hyperbolic discounting and borrowing
aversion. The study aims to explore how time discounting impacts the utilization of
debt, particularly formal debt, using an empirical approach.
To obtain more insights about these impacts, the following hypotheses is
proposed and summarized via the table 1.
TABLE 1: HYPOTHESES DEVELOPMENT
N Sign of
Construct Explanation
o effect
Relationship
H between debt Debt sensitivity has a negative impact on
-
1 sensitivity and use decision of using formal debt
of formal debt
Relationship
H between financial There is a positive relation between financial
+
2 literacy and debt literacy levels and perceptions of deb
sensitivity
Relationship
H between financial Financial literacy has a negative impact on
-
3 literacy and use of decision of using formal debt
formal debt
Relationship
H between self- Self-assessment has pose a positive impact on
+
4 assessment and debt sensitivity
debt sensitivity
There exists the negative relations between self-
Relationship
assessment and use of formal debt, which can
H between self-
- be assessed through the connections among 3
5 assessment and use
variables: self-assessment, debt sensitivity and
of formal debt
use of formal debt
Relationship
H between personal Personal characteristics has pose a positive
+
6 characteristics and impact on debt sensitivity
debt sensitivity
There exists the counter relations between self-
Relationship
assessment and use of formal debt, which can
H between personal
- be assessed through the connections among 3
7 characteristics and
variables: personal characteristics, debt
use of formal debt
sensitivity and use of formal debt
Research methodology
Sample
The study approaches the quantitative research method with the primary dataset
collected by a combination of convenience sampling and snowball sampling
techniques, representing undergraduates of generation Z with a diversity of majors and
universities in the North of Vietnam.
Data analysis method
The study performs descriptive statistics, evaluate the reliability of the scale
through Reliability analysis by Cronbach’s alpha, Confirmatory Factor Analysis
(CFA). Subsequently, the Structural equation modeling (SEM) model is utilized to
evaluate multi-relationships as a result of observing and experimenting processes.
Research model
This study aims to examine whether some specific determinants chosen from
financial literacy, self-assessment, and personal characteristics categories significantly
affected the use of formal debt in compliance with the number of prior research.
Otherwise, one more variable from the psychological aspect was added as a mediating
variable - Debt sensitivity, which turned the original simple relationship into an
indirect and more complex one.
Research results and discussion
There are 406 valid responses in total of 473 responses were collected with 46
respondents indicating unfamiliarity with the BNPL service. In the sample study, the
ratio of men (43.8%) and women (56.2%) was evenly balanced. Among 406 survey
respondents, the author calculated that there were 280 respondents being debt averse,
accounting for 68.96%. About 22.66% of the respondents were debt lovers, and only
8.38% of them were debt neutral.
The model undergoes a testing process including internal consistency,
convergent validity, discriminant validity, and collinearity testing techniques prior to
approval of the final calculated results. Eventually, there are no errors existing with the
R-squared value ranging from 0.631 to 0.777, which means the model is reasonably
ideal to be launched for research purposes.
To summarize, there are five out of seven hypotheses are accepted, which are
specified as below:
H1. There exists a negative relationship between debt sensitivity and use of formal
debt
H2. There exists a positive relationship between financial literacy and debt sensitivity
H3. There exists a negative relationship between financial literacy and use of formal
debt
H6. There exists a positive relationship between personal characteristics and debt
sensitivity
H7. There exists a negative relationship between personal characteristics and use of
formal debt
Research has shown that the way individuals react to terms like "loans" or
"debt" can shape their attitudes. Labeling effects, which refer to the impact of phrasing
on individuals' responses, have been used to evaluate debt sensitivity. Individuals with
high sensitivity to debt, characterized by careful consideration in various situations,
are less likely to use formal debt. This finding is consistent with previous research.
Financial literacy is another important factor influencing borrowing behaviors.
Individuals with lower levels of financial knowledge are more likely to use expensive
credit options. Self-efficacy, or individuals' belief in their ability to manage debt, is a
key factor in decisions to utilize formal debt. Studies have shown that higher levels of
self-efficacy can reduce excessive spending and prevent credit misuse. However, our
research suggests that the correlation between self-efficacy and inclination toward
formal debt is not clearly defined. One possible reason for this inconsistency is the
difference in how self-efficacy is measured among studies. It is important to consider
individuals' confidence based on their self-assessment and actual financial literacy
when evaluating self-efficacy levels.
The study also explores the relationship between personal characteristics, such
as prepayment preference, time discounting, and social comparison, and the decision
to use financial borrowing. Prepayment preference is found to have a negative impact
on formal debt inclination, as consumers prefer upfront payments. Time discounting is
linked to hyperbolic discounting, with individuals struggling with debt favoring
immediate rewards over future gains. Social comparison plays a crucial role in
influencing the decision to engage with formal debt, especially in the digital era. The
research found that social dynamics significantly influence financial decision-making,
as individuals observe and evaluate themselves in comparison to others.
Conclusion and recommendations
The study focuses on the debt usage intentions of Generation Z undergraduate
students in Vietnam and introduces the concept of debt sensitivity perception. By
utilizing SEM and microeconomic theories, the research has comprehensively
organized previous research on formal debt instruments, in particular, Buy Now, Pay
Later (BNPL). The empirical results indicate how debt sensitivity, financial literacy,
and personal characteristics—such as prepayment preference, time discounting, and
social comparison—affect these intentions negatively, while self-assessment shows no
negative impact, contradicting previous findings.
By exploring the impact of debt sensitivity on Generation Z's use of formal debt
instruments like Buy Now, Pay Later (BNPL), the study aims to equip Gen Z students
with the skills to critically assess these options by consulting reliable sources. The
study highlights that an awareness of one's debt sensitivity can significantly affect the
intentionality and efficacy with which undergraduate students approach formal debt.
Generation Z might find such formal financial solutions advantageous for supporting
their business ventures and personal projects, presenting a viable alternative to
informal borrowing methods, such as loans from family and friends. Besides, young
users should consider the purpose, affordability, and flexibility of these formal debt
services carefully, keeping in mind the risks associated with any borrowing system.
 In Vietnam, Buy Now, Pay Later (BNPL) has become a popular formal debt
service, particularly among young and tech-savvy shoppers. The sector is expected to
grow steadily into 2024, buoyed by increased online shopping during COVID-19
lockdowns, which offered flexible, interest-free payment plans without requiring a
credit card. This trend reflects their desire for secure, structured financial products and
the appeal of innovative, convenient lending solutions. Therefore, financial institutions
can implement strategic changes to their product offerings and customer engagement
approaches by introducing more user-friendly digital platforms, flexible repayment
plans tailored to the financial realities of young borrowers, and educational initiatives
aimed at enhancing financial literacy and responsibility.
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