It’s only 10 years after our worst economic crisis since the Great Depression, and Americans seemed to have forgotten all about it. Average American debt has soared yet again. Total household debt in the nation was $13 trillion in the third quarter ending September 30, 2017. This was the 13th quarter in a row that household debt increased. It was also record debt and $280 billion above the previous record for debt set in the third quarter of 2008 during the recession. The ratio of debt is different today than it was in 2008. More people have taken on auto loans and student loans, but fewer people have mortgages.
Sadly, 68% of adults who are in debt in America say they don’t know when or if they will ever be free of debt according to a recent survey. After the recession in 2008 to 2009, people were shaken and tried to rid themselves of debt. Now people are increasingly adding to their debt, even though 45% say they don’t want to go further into debt.
Economists are casting a wary eye, but because incomes are higher today, the risk is not as great as it was when the bubble burst in April 2008. In 2008, the ratio of debt-to-GDP was 6.5%. Today it is 5%.
But that doesn’t mean we shouldn’t be concerned. Credit card debt has reached an all-time high. Households with any kind of debt owe $131,431 on average including mortgages. Incomes have not kept up with rising costs in many areas. Though income has grown 20% in the last 10 years, healthcare costs have increased 34% and food costs have increased 22%.
Let’s take a closer look at some of America’s primary categories of debt.
Mortgage balances are the biggest category of average American debt, and stood at $8.74 trillion in the third quarter of 2017, a $393 billion increase from the year before and a $52 billion increase from the previous quarter. The average mortgage balance was $137,00. 1.4% of mortgages are 90+ days delinquent
We can probably expect to see mortgage debt to increase in 2018, because Fannie Mae announced in July 2017 that it is increasing its allowable debt-to-income (DTI) ratio limit from 45% to 50% of gross income. This makes a home mortgage much easier to get.
The recession of 2008 ten years ago negatively impacted the rate of home ownership. It peaked at 69 percent in 2004, and has continued to drop in recent years until in 2016 it reached 63.4%, the lowest rate in 50 years. In third quarter 2017, the home ownership rate was at 63.9%.
While many borrowers are refinancing to private student loans to get a reduced interest rate over the generally high federal rates, student loan debt has steadily increased for several years and is a large contributor to the average american debt. In the first quarter of 2016, it was $1.28 trillion, and it reached $1.36 trillion by November 2017, which is a $78 billion increase from the year before. The average debt was $46,597 in 2017. In 2015, the average student loan debt was $30,100, a 4% increase over 2014.
For five years, default rates decreased, but in third quarter 2017, the U.S. Department of Education released data showing that borrowers not making payments on their federal student loans within three years of graduating college increased. The total default rate is 11.5%, and previously it was 11.3%. 580,671 borrowers defaulted within three years from October 1, 2013 – September 30, 2016. Here is how the default rate varied among college categories:
By June 30, 2017, there was a record 8.5 million federal student loan borrowers who were in default. $140 billion in student loans was in default by third quarter 2017, 1/10 of outstanding federal student loan dollars. These numbers are skewed as well because many borrowers are enrolled into income-driven repayment plans and are not making the full payments on their loans or even any payments on their loans. These borrowers are not in default, yet cannot afford the monthly loan payments. Student loan borrowers using these income-driven repayment plans can be delaying the payoff of their loans when they might want to be paying down the student debt as fast as possible.
According to a working paper distributed by the National Bureau of Economic Research, student loan defaults are tied to drops in housing prices. This is not because of a direct correlation, but because the effect of declining home prices on a region’s labor market contributes to rising student loan defaults. When the values of homes fall, it affects local businesses, workers’ pay and lay-offs.
Credit Card Debt
in November 2017, the Federal Reserve announced that our revolving debt, which is mostly credit card debt, reached an all-time high of $1.02 trillion, soaring past the revolving debt Americans held in April 2008, right before the recession. Revolving credit has increased 5.7% — that’s $55.1 billion – in the last year according to the Fed and Contingent Macro Research. Of that revolving credit, $905 billion is credit card debt, which does not include overdraft plans of credit that don’t necessarily belong to credit card users. For households that carry credit card debt, the average balance is $15,654, and the average household pays $904 in interest annually.
People use their credit cards both for necessities and for discretionary spending. 33% reported using credit cards to buy necessities in a recent survey. This may be attributed to rising cost of living in areas such as healthcare and food. Around 27 million adults use their credit cards to pay for medical expenses, resulting in spending an average of $471 in interest every year. In total, this interest amounts to over $12 billion. Many turn to credit cards to get by if they suddenly find themselves without a job. And some people just use them to live beyond their means. 41% of those with credit cards report using them to make unnecessary purchases. People even sometimes use their credit cards to pay their rent.
Auto loans is another area of debt that contributes to overall average american debt, and spending on autos has been steadily increasing. Auto loan balances increased to $1.2 trillion in third quarter 2017, continuing a six-year trend of increases.
Delinquencies have also increased, particularly among sub-prime borrowers with scores under 620. About 23 million people hold subprime auto loans, and 20% of new car loans go to sub-prime borrowers. Loans to subprime lenders are made by auto finance companies rather than banks, and there are about $435 billion of auto loans outstanding that were made to borrowers with a credit score below 660. Auto loans from traditional bank lenders had a 4.4% 90+ days delinquency rate in 2017 compared to 9.7% from auto financing companies.
Average American Debt
Many Americans are increasingly digging themselves into debt, and the further and longer they go, the harder it is to get out. Credit can make good things possible in our lives, such as a college education. But credit can create a prison for those who use it unwisely. Though most economists are not yet alarmed, we are reaching new heights in our spending, and there is a limit before it all comes crashing down. Again.
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.