Jun 2, 2017
Household Debt: What Is It and Why Does It Matter?
Is this debt good or bad for the economy? The answer is a bit complex.
Household debt is on the rise. But what is household debt, anyway?
When we talk about household debt, we’re referring to the amount that people are borrowing to buy automobiles, houses, and to finance their educations.
A new report says that household debt is on the rise again in the U.S., and it’s approaching levels last seen right before the financial crisis.
The new findings come from the Federal Reserve Bank of New York, which reports that debt for everything from credit cards to mortgages and new cars has climbed to $12.7 trillion. That’s $50 billion more than the peak reached just before the recession hit in 2008.
So is household debt good or bad for the economy? The answer is a bit complex:
Household debt: Not all debt is bad
In fact, debt can fuel personal spending which is good for the economy. And in your own life it can help you get things like an education or a house, which can be critical underpinnings for your life.
A good education, for example, can help advance your career. And a house is an asset that’s likely to have value long after you pay off your loan for it.
When we hear the words “debt” and “2008 recession” we get a little nervous. But record household debt doesn’t necessarily mean that we’re going to return to the past.
In short, the Fed’s report suggests there’s a lot of economic strength that did not exist prior to the recession.
Household debt: Student loans
Loans for education are now the second-biggest part of total consumer debt after mortgages, according to the report. Total student loan debt is at a record $1.3 trillion, more than double what it was about 20 years ago, the New York Times reports.
That’s because the cost of education has gone up dramatically in recent years, and students have to borrow more to get their degrees. The average student now carries $37,000 in student loan debt when they graduate, roughly triple the amount 25 years ago.
This level of indebtedness can take years for college grads to pay off, and it could significantly restrict your ability to save money and invest, not to mention to do things like purchase a house or some other big item.
Cars and credit cards
Similarly, consumers are borrowing more to purchase cars. Auto loan debt grew by $10 billion to $1.1 trillion. Unfortunately, late payments for auto and education loans are both on the rise, which is a sign consumers may be borrowing more than they can afford to pay back.
On the plus side, borrowing on credit cards decreased a bit. Balances on cards dropped $15 billion in the first three months of 2017, according to the bank report.
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