Household Debt Makes a Comeback in the U.S.
It took nearly a decade, but debt has made a comeback.
Americans have now borrowed more money than they had at the height of the credit bubble in 2008, just as the global financial system began to collapse.
The Federal Reserve Bank of New York said Wednesday that total household debt in the United States had reached a new peak — $12.7 trillion — in the first three months of the year, another milestone in the long, slow recovery of the nation’s economy.
The growing debt level shows that many of the millions of Americans who struggled during the recession have sufficiently repaired their credit to qualify for loans. It also suggests a rising optimism about economic growth among banks and other lenders.
Debt can fuel consumer spending, which accounts for nearly 70 percent of all economic activity in the United States. It also allows Americans to make large investments in education and housing, which can help build personal wealth and financial stability.
Yet the borrowing peak also signals the potential for new risks to the economy.
One of the major factors behind the latest debt binge has been student loans, a mounting burden that can stifle economic growth by preventing Americans from buying homes or spending on big-ticket consumer items.
The fear is that ballooning debt from student loans — and from auto loans and credit cards — could put many Americans back into a hole, prompting a new wave of defaults, much like the one that accompanied the mortgage meltdown a decade ago.
“This is not a marker we should be superexcited to get back to,” said Heather Boushey, the executive director and chief economist at the Washington Center for Equitable Growth, a liberal think tank. “In the abstract, more debt signals optimism. But in reality, families are using debt as a mechanism to pay for things their incomes don’t support.”
Since World War II, total household debt had been increasing, with only a few interruptions. The financial crisis changed that steady upward march.
In late 2008, household debt began a decline that would last for 19 consecutive quarters, an unprecedented period of deleveraging during which many Americans shied away from new borrowing. Total debt began to rise again in 2013, finally hitting a new high in this year’s first quarter.
There is reason to believe that borrowers should be able to better manage their debt now than they did during the financial crisis. The nation’s debt load is reaching new heights at a moment when the economy is expanding, a dynamic that makes the latest peak in borrowing less worrisome to economists.
And households today are borrowing differently than they did nine years ago. Student loan debt, driven by soaring tuition costs, now makes up 11 percent of total household debt, up from 5 percent in the third quarter of 2008.
By comparison, mortgage debt is 68 percent of total debt, down from 73 percent during the same period. The household debt figures are not adjusted for inflation.
Student borrowers today owe $1.3 trillion, more than double the $611 billion owed nearly nine years ago. About one in 10 student borrowers is behind on repaying the loans, the highest delinquency rate of any type of loan tracked by the New York Fed’s quarterly household debt report.
The student loan market is nowhere near the size of the $8.6 trillion mortgage market, making student borrowing less of a threat to the global financial system than the bad housing loans that touched off the financial crisis in 2008.
But there are similarities in how student loan debt — like mortgage debt a decade ago — has managed to pile up.
One idea underpinning the mortgage boom was that homeownership was a clear-cut route to building wealth. That notion was shaken by the housing collapse, which left millions of Americans in foreclosure and their finances in ruins.
Students have gone deep into debt in the belief that a college degree will eventually lead to a higher income. But many students have graduated into a job market where wages have been rising slowly, leaving them with more debt than they can pay off.
Economists are now unsure about how this mountain of student debt will affect the broader economy. Unlike mortgages, student loans cannot typically be shed or restructured, which means that more Americans are shouldering a type of debt that could weigh them down for the rest of their lives, preventing them from buying homes or starting businesses.
“Student debt is a different animal with different rules,” said Diane Swonk, founder of DS Economics in Chicago. “It has some good effects, but not always.”
Alyssa Pascarosa, 26, owes $100,000 related to the bachelor’s degree in sociology she received from the University of Pittsburgh in 2013. The debt shapes nearly all of her financial choices. Ms. Pascarosa initially planned to attend law school but changed her mind after realizing that pursuing that career path would double or triple her debt load.
Instead, Ms. Pascarosa moved back in with her mother in Easton, Pa., where she works as a graphic designer.
“I would like to move out at some point soon,” she said, “but with my loans, I can’t justify spending money on rent.”
Economists have found signs that high student debt levels have contributed to a slowdown in young adults’ household formation and a decline in early homeownership.
There are many benefits, of course, to the boom in student lending. More Americans now have college degrees, which will probably increase job opportunities and wages over time.
Workers with a four-year college degree earn significantly more than those without one, in aggregate. And borrowing money to obtain a college degree often proves to be a better investment than taking out a mortgage to buy a home. But how that plays out can vary widely in individual geographic areas and career fields.
Student loans are not the only area in which debt has grown rapidly.
The New York Fed report also shows how growth in auto lending over the past decade has made up for slower mortgage lending. Auto loans totaled about $1.1 trillion, or 9 percent of all household debt, in the first quarter of 2017, up from 6 percent in the third quarter of 2008.
Defaults have crept up in auto loans, one of the few sectors in which lenders were willing to extend credit to subprime borrowers after the 2008 crisis.
Mark Zandi, chief economist at Moody’s Analytics, said defaults on student and auto loans were a “financial blemish” on otherwise healthy household balance sheets.
“It is not an existential threat to households and the economy,” Mr. Zandi said. “It is an area where there is some stress.”
More broadly, the economic picture looks far less precarious than it did in late 2008. The amount of monthly income that Americans must spend paying off their debt is smaller, and employment is flush.
That made last month feel like an opportune time for Caitlin Farrell, 34, and her husband to buy their first home, a 1,500-square-foot, two-bedroom house in Sacramento. Ms. Farrell, who works as an education policy researcher, got her home loan from SoFi, a start-up online lender that moved into the mortgage market last year.
“We had been renting and moving all through our 20s,” Ms. Farrell said, “and now seemed like the right time to get in.”
Reported by: NY Times