I have trouble making out what people say, even at a close distance. i do not think there's anything wrong with my hearing. could it be psychological?

Yes, it can happen: But it struck me that a more common attitude would be the opposite. In any case, hearing can be checked fairly easily to rule out the ear functioning. Also, if you feel that your thoughts ; feelings do unusual things for your perception, it is worth some attention in therapy - even if your hearing is compromised. Being distracted vs trying, but failing can make a difference too. Find answers. Best.