The U.S. economy has experienced uninterrupted quarter by quarter growth since 2009. We are at full employment. Even wages have risen this year after lagging behind other economic statistics for a long time. And yet, household debt in the U.S. has risen to $13.67 trillion, the highest level it has been at since the recession in 2009. This staggering number includes record levels of student loan debt, credit card debt, personal loans and auto loans.
Some will say that all this debt is not all bad. When mortgages and auto loans are booming it makes for a healthy real estate and auto industry, two key indicators of the state of the American economy. And debt that leads to an improvement in one’s future financial status is sometimes called “good debt.” A student loan that enables a college degree that increases one’s earning potential is an example.
But the consequences of debt on the individual are not so rosy. Taking on debt pretty much assures that you will pay more for anything you buy because of the interest, more than what the item you bought was worth. Debt may cause your credit rating to drop to the point where you are unable to buy a home or make other large loan-based purchases. Of even greater consequence are loans that you have no ability to repay that may prevent you from accumulating any savings or retirement account. Or it may lead to foreclosure.
A stunning example was provided by a recent investigative piece in the New York Times about loans made to cab drivers for their medallion yellow cabs. Drivers, many of whom are immigrants, were loaned up to $1 million to buy the medallions when realistically they were likely to earn no more than $25k to $30k a year. For a number of these cabbies the answer was suicide.
Student loan debt in America is now at a record $1.5 trillion. One out of every four Americans has student debt. So we’re not just talking about young people right out of college. It’s some 44 million people. And as the volume of student loan debt has increased so has the delinquency rate. Nitro, a college planning service, pegs the rate of loans that are 90 days past due at 11.5%. That’s higher than delinquency rates for mortgages, auto loans, credit cards or home equity loans.
According to the Federal Reserve, U.S. consumers had $1,057 trillion in credit card debt in March of this year. The average per household was $8,286. They claim that 53% of Americans make only minimum payments on their cards. That, of course, makes credit card debt the gift that keeps on giving…to the credit card issuer, that is. The Fed also notes that 43% of Americans spend more than they take in each month.
One of the reasons for the record volume of credit card debt is medical expenses. About a half million Americans declare medical bankruptcy each year. This is something that is unthinkable in most other Western democracies. These people may have maxed out their credit cards or they may have lost their jobs because of their illness or condition. One statistic that I found particularly alarming is that of these bankruptcy declarations, 78% had insurance, but they were still unable to keep up with the co-pays, deductibles and uncovered expenses.
While the enormous wave of foreclosures due to delinquency on mortgages has eased since the peak years following the recession, there remains a lingering trail of delinquencies and foreclosures.
It is estimated that about 9 percent of U.S. properties are significantly “underwater,” meaning that the value of the property is less than the amount owed on the mortgage. The Fed reports delinquency rates holding steady in the 4-5% range, but a report earlier this year by Moody’s predicted this would go up in 2019 because of looser lending practices and rising interest rates.
How did this debt explosion happen? In my next post, I look at some of the reasons why American consumers are off the charts when it comes to debt.