Emma Finnerty
The news is full of debt horror stories. Student loan debt and credit card debt have recently passed dubious milestones. This doesn’t bode well for consumer finances. The total outstanding student loan debt stands at slightly over $1.5 trillion, according to the Federal Reserve.
Meanwhile, outstanding credit card debt recently passed the $1 trillion mark, though it quickly slid back to just under $1 trillion. These are seriously large numbers, and news stories portray grim pictures of indebted individuals struggling against massive payments.
Certainly, there are individuals struggling under debt. And individuals struggling without debt, as well. The issue bears analysis. What is the economic effect of all this debt, collectively and for individual consumers? It’s complex. But here’s some perspective of the impact of these debt burdens in America today.
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Gaining Perspective on Debt in America
Big numbers alone are hard to get a feel for. It helps to have some perspective. Two other big numbers can help with this. The total amount of outstanding car loans in the U.S. is about $1.3 trillion. Pretty much right between the credit card debt totals and the student loan totals. The total outstanding on residential mortgages in the U.S. is a little over $9 trillion.
Not everyone has each of these debts. Many people don’t have any of them. The average debt per person is pretty much meaningless. Debt directly affects those who hold it, and perhaps affects the economy overall. But it doesn’t directly affect all of our citizens.
There’s also induced complexity due to how the numbers are reported. It makes a big difference whether we’re talking about debt per indebted individual or debt per indebted family. There’s a trend in the media to use per-family indebtedness. Those numbers look worse. But however you look at the numbers, you have to be very clear on what they mean. Otherwise they’re meaningless.
Not All Debt Is Created Equal
Mortgage debt is clearly related to an asset: You obtain a mortgage so that you can buy a home that you couldn’t purchase without one. Auto debt is also tied to an asset, but the asset declines in value and is typically nearly worthless by the time it’s paid for.
Student loan debt is a little trickier. It’s not tied to a physical asset. The bank can’t repossess your degree. But people take on student debt with the assumption that it’s a ticket to higher income. Students exchange some amount of future earnings for the ability to obtain a degree that will allow them to get those earnings. Theoretically, it makes sense. Practically, well, we’ll see shortly.
Credit card debt really has no redeeming value. Some of it is incurred to obtain assets that offset or negate the debt. But generally, credit card debt is a financial cancer, sapping the health of a family’s or individual’s finances without any meaningful contribution.
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Credit Card Debt
The trillion dollars of outstanding credit card debt is not an amount that’s rolled over from month to month. The total amount of outstanding credit card debt includes amounts that consumers will pay in full when billed. This is the transactional portion — the amount people “responsibly” charge and pay off when the bill comes in.
There is also a persistent portion. These are the credit card balances that people roll over from month to month. Both are included in the $1 trillion number.
The transactional portion of the outstanding credit card debt doesn’t present a problem. People use credit cards for a variety of reasons and then pay their balances off in full. This is a choice, perhaps for ease of use, perhaps for rewards points or other perks. Whatever the reasoning, transactional use of credit cards doesn’t drain the finances of individuals or harm the economy.
However, the persistent portion of credit card debt is a problem. Mostly.
If we look at credit card debt per person, with $1 trillion outstanding and 328 million people in the U.S., it’s about $3,050 per person. That's a pretty meaningless number, as not everyone has credit card debt. For those with credit card debt, the average individual has a balance of around $6,700. Meanwhile, the average household with credit card debt has a balance of about $8,300. The difference is that some, but not all, households have multiple credit debtholders.
Note that there are variations in how these numbers are reported. Depending primarily on what goes into the denominator — whether you consider all cardholders or only cardholders with balances, etc. — the numbers can be viewed as either a bit higher or a bit lower. But if you keep calculating the numbers the same way, you’ll find that the trend remains in a negative direction. Average balances, however you choose to define them, have increased significantly over the last five years.
A typical individual with $6,700 of outstanding credit card debt will have a minimum monthly payment of about $270. Big, but not unmanageable. Collectively, the minimum monthly payments add up to around $20 billion. That’s $20 billion each month that mostly goes toward interest. Wasted on interest.
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The average wage earner with average credit card debt isn’t generally the problem. People whose debt is large in relation to their earnings are the most likely to get into debt trouble. It could be someone with $4,000 in debt but only $10,000 in income or someone with $100,000 in debt and $150,000 in income. It’s not the average where most of the problems occur.
Whether the debt load is a problem or not depends on each individual’s situation. For some people, $6,700 in credit card debt is destroying them financially. For others, it’s a minor monthly expense. It’s all relative to what you make.
Student Loans
Student loans are a different animal. It's a larger pile of debt, and it’s shared by a smaller pool of people.
But again, it’s not the average debtholder with average income who's running into trouble. An average student loan debtholder has a student loan payment between $200 and $300 a month. But for some people, it’s much higher. And for some people, their income just isn’t enough to support any level of payment. Averages can be very misleading.
There are lots of horror stories out there about young couples who can’t buy a house because of their student debt. But that’s not the norm. A student loan payment of a couple of hundred dollars a month might cause someone to afford less house than they want. Often, it’s more of a problem of two big car loans, an expensive lifestyle, and some additional debt on top of student loans that’s causing a problem in getting a mortgage. That’s bigger than a student loan problem.
The average income for a high-school graduate with no college education is $35,000 per year. For a college graduate with a bachelor’s degree, the average is $59,000 per year. The average college graduate with a bachelor’s degree will earn about $1 million more in her career than the worker with a high-school education, but no college. And she incurred about $37,000 in debt, on average, to get that million. Not too shabby.
The exchange — trading debt for the promise of a high-paying job — doesn’t always work out. Students graduating five to 10 years ago were coming out into a lackluster economy. People with experience were working part-time jobs to get by. Sure, some graduated into great jobs. But others found more difficulty than opportunity.
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Not everyone is reaping that extra income from having a college degree.
And not everyone with student loan debt graduates. The defaults on student loan debt are highly skewed toward small balances. Those with a couple thousand dollars in debt, often early dropouts, have the highest likelihood of default.
Graduates often take advantage of income-based repayment plans to make their payments, at least temporarily, affordable. But those who never complete school often also have college debt, but no enhanced income to help pay it off. That said, you might be able to refinance your loans through companies specified to student loan refinancing.
For the average person, it’s not really a problem. For many, due to circumstances beyond their control, it is a problem. Debt without a degree is a problem for many. Debt without a job, whether you have a degree or not, is also a problem. And for those with huge piles of debt — sometimes a hundred thousand or several hundred thousand for an advanced degree — it’s often a problem, as well. Sometimes you just can’t get to that carrot out there on that stick. It stays out of reach.
Economic Impacts of Debt in America
There’s a definite economic drain from all this debt. The combination of credit card debt and student loan debt payments totals around $100 billion to $110 billion per quarter. Against consumer spending of $15 trillion per quarter, it doesn’t look so awful. But for those who face the bills each month, it’s very real.
Even a few hundred dollars out of an average person’s budget every month is a very real drain. For those college graduates who have increased their earnings with their degrees, it’s generally pretty manageable. But for those who incurred a great deal of debt, and for those who didn’t graduate, the picture’s pretty grim.
The trend is alarming. The rate of debt increase is astonishing. Both credit card balances and student loan balances have skyrocketed and are still skyrocketing. The current situation may be manageable. But the path we’re on will lead us out of the realm of manageable rather quickly.
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As with everything in personal finance, it’s personal. Whether or not an amount of debt is manageable in your budget depends on the size of your budget and what else is in it.
There are a lot of individuals having trouble with credit card debt and student loan debt. This debt has a definite economic drain. Presently, it’s a crisis for a limited number of people. But the trajectory is not good. Without some change, the situation will get a lot worse in the not-so-distant future. The time to act is now.
