The Copenhagen authors also found that for the same interest rate, the default incidence was substantially higher for those whose parents were in default than for those whose parents weren't. Loans with an interest rate of 5 percent had a probability of default within the next seven years of 0.5 percent if a parent wasn't in default in 2004, but the probability rose to 1.75 percent if a parent was, the authors write.
That means that “individuals with parents who are not in default on average pay an interest rate penalty to cover the losses incurred by individuals who default because they have adopted the financial behavior of their parents,” the study found. That's because the two types of borrowers pay the same rate, all else being equal.
The researchers note that some of their conclusions may not apply in countries without Denmark’s strong social safety net. They looked to see if parents and kids might both default on loans because a parent had strained his or her resources to provide financial help to a child, but a drop in financial wealth for Danes who became unemployed wasn't accompanied by a decline in their parents' wealth. In fact, in countries with weaker social support systems, such as the U.S., parents are likelier to put their own finances in peril to help out kids in trouble. The parent-child relationship, then, could have an even stronger correlation in loan defaults, the authors write.
Even if some of our attitudes toward money are hard-wired, no one wants to pass along a legacy of financial instability. There are many ways to nurture self-control and highlight the difference between “wants” and “needs." Beyond prompt loan repayment, that goes for the panoply of our financial lives, from weekly budgeting to retirement saving.
The Consumer Financial Protection Bureau’s "Money As You Grow" tackles these issues in its online book club for parents and kids. The group's most recent pick, for kids between 5 and 8, is Those Shoes, by Maribeth Boelts, about making tradeoffs and setting priorities.
Those tradeoffs and priorities can be agonizing for many Americans at a time of acute income inequality. But if you're able to be a smart saver and shopper and make the tough budgeting tradeoffs—and if you let your kids see all that at the grocery store and when you're paying the bills—they're likelier to adopt these behaviors as adults.
This article was provided by Bloomberg News.