Returning to the Nest: Debt and Parental Co-residence among Young Adults

In standard life-cycle models, borrowing enables young adults to smooth consumption, but for those who are indebted and face high borrowing costs, parental co-residence could serve as an alternative smoothing mechanism. This paper investigates if young adults use parental co-residence to smooth consumption by examining the relationship between debt characteristics which are typically associated with higher costs of obtaining credit and subsequent decisions to enter and exit parental co-residence. We find lower credit scores, greater debt balances and debt delinquency are associated with increased flows into parental co-residence, and differentially so for subprime borrowers, who all else equal face increased costs of additional credit. To address the possibility that unobserved factors drive both debt and co-residence, we analyze plausibly exogenous reductions in credit card limits initiated by banks during the Great Recession, which confirms a causal relationship between access to credit and co-residence decisions. Overall, we find that the changing debt portfolios of young adults – most notably characterized by rising student loan debt – can predict 32 percent of the observed increase in flows into co-residence, and 26 percent of the observed increase in time spent in co-residence between 2005 and 2013. JEL Codes: D14 J11 D91