Even though the U.S. is a materialistic, capitalistic, even hedonistic society, our puritanical roots show through. We pride ourselves on our freedom, but we can’t help lecturing our fellow Americans about their behavior. You can see it in the rise of public shaming: slut-shaming, fat-shaming and now debt-shaming.
The 250 million Americans who are struggling to pay the bills and to get ahead are constantly being scolding by academics, journalists and prudes about their poor financial habits.
We spend too much on frivolities, like new clothes. We waste too much money on avocado toast and lattes. We shouldn’t smoke, or drink. We shouldn’t have kids. We shouldn’t go to college. We shouldn’t retire.
The debt scolds would have you believe that Americans are racking up way too much debt, and that the day of reckoning is nigh. However, the facts don’t support that dire warning.
Slowdown in debt growth
Clearly, there are some families who’ve taken on too much, but in the aggregate, American households aren’t drowning in debt. Foreclosures and bankruptcies are the lowest they’ve been since 2000. Less than 2% of outstanding debt is delinquent, about half what it was seven years ago.
The debt-to-income ratio has been surprisingly steady since the Great Recession, a sign that American families are more responsible about borrowing.
In 2006, at the height of the housing bubble, household debt totaled 116% of annual disposable income; now it’s 90%. The debt-to-income ratio — one gauge of the ability to pay — has been remarkably stable since 2012.
Household debt has been growing at the slowest pace of the post-World War II era. From 1980 to 2007, debt in real (or inflation-adjusted) terms grew at an average annual rate of 5.3%. But since the financial crisis began 10 years ago, real household debt has fallen by 11%. Over the past five years of expansion, real debt has grown at a 1.4% annual rate.
American families are spending a smaller portion of their income servicing their debts.
The latest data show that Americans are spending a smaller portion of their income on debt service than at any time in the last 38 years. At the height of the housing bubble, Americans were spending about 13% of disposable income on servicing their debt; now it’s less than 10%.
Most important, the people who owe that debt, for the most part, are the wealthiest Americans who can well afford to pay it back. The poor and working classes, by contrast, have borrowed much less. Most of their debt is for a home, a car and maybe a college loan.
Those aren’t frivolous purchases. Indeed, they are the building blocks of financial success. It’s difficult to find a good job without reliable transportation. Families who don’t have higher education, or own a home, are less likely to build wealth.
The debt scolds want us to think that borrowing money is a sin. Whether that’s true is between you and your god. As a practical matter, though, there are only two real considerations when it comes to borrowing: What are you going do to with the money? Can you afford it?
If that is the proper way to judge it, Americans, for the most part, are borrowing responsibly. They are borrowing for long-range needs that will improve their lives: A home, a car, an education.
And they are (mostly) paying back the money they borrow. The major exception is people who took out a student loan to go to a dodgy school.
These numbers will probably surprise a lot of people. That’s because any discussion of debt usually takes on a moral tinge. The data are frequently taken out of context, and presented as scary big numbers without concern for how inflation or population growth could affect them. The ability of borrowers to pay — out of income or assets — is usually ignored.
About three-fourths of American households have some kind of debt, according to the Federal Reserve’s definitive 2016 Survey of Consumer Finances. That’s little changed from the 2007 survey. The median amount owed was $78,000 in 2007, but just $59,800 in 2016. (These and subsequent debt numbers are all adjusted for inflation).
Housing-related debt fell sharply, while debt for student loans and vehicles rose.
About 42% of families have a mortgage or home-equity loan, with a median value of $111,000, down from $124,000 10 years ago. About 44% of families owe something on their credit card, with a median balance of $2,300, down from $3,500 10 years ago.
About a third of families have a vehicle loan, with a median balance due of $12,800, down from $13,400 in 2007.
Nearly a fourth of families have a student loan, with a median value of $19,000, up from $13,900 in 2007.
Of course, these figures are just aggregates, which could hide important differences between the lower, middle and upper classes.
Generally, the more a family makes, the more likely it is to be in debt; except for the very richest families, who have enough cash flow to pay outright for vacations, education, even vehicles and homes. Still, the richest 10% of families — those who make over about $163,000 — have a median debt of $300,000, up from $272,000 in 2007.
The group that’s most likely to owe money is the upper middle class — those who make between around $116,000 and $163,000. About 90% of this group has some debt, and they owe about $172,000, down from $211,000 in 2007.
The poorest group — those who make less than about $23,000 a year — are least likely to have debt, although more of them have taken on debt in the past 10 years, mostly for student loans (this group includes a lot of young people.) About 58% of these families have some debt, with a median value of $10,200, about the same as 10 years earlier. Few of them have a home or car loan. The typical credit card balance for this group is $800.
About 70% of the lower middle class — those who make between about $23,000 and $43,000 — has some debt, with a median balance of $23,500, up from $20,800 in 2007. Student loan growth accounts for most of that increase.
The middle of the middle class – those who make between $43,000 and $75,000 – are more likely to have debt than those who make four times as much, with 84% having some debt. The median balance, however, is just $42,400, down from $63,100 10 years ago. This group has improved its debt burden the most in the past 10 years, going from 133% of disposable income in 2007 to 80% today, but that improvement is largely due to a sharp decline in the homeownership rate to 64%, from 69%. Student loans are the only kind of debt that’s growing for this income group.
The more prosperous middle class — those making between $75,000 and $115,000 — have a median balance of $102,000, down from $128,900 in 2007. About 88% have some debt, most of it in a mortgage.
The debt scolds are fighting the last war. They remember the housing bubble, and think the next crisis will be just the same. But American families have clearly altered their behavior since then. They are borrowing more responsibly — more in line with their incomes, their assets, and the value that the debt will create.
Student loans have been the fastest-growing segment, but that’s a bad thing only if you can’t pay it back (because you can’t just walk away from a student loan the way you can from a mortgage or auto loan).
In today’s economy, you need advanced education to succeed, so it makes perfect sense to borrow if need be to invest in your own human capital. Of course, you need to be a smart borrower: Go to a real school that will give you real skills. Go to class. Do your homework. Get connected with other smart people in your field. Graduate. Get to work. Be a success.
And ignore the debt scolds, the puritans who think they know what’s best for you. They don’t. I bet they went to college, own a house and a car, and occasionally use their credit card in an emergency or just for a splurge. It isn’t easy, but it’s the path to the American Dream.