Banks and Business Have Bounced Back, but Consumers Still Struggle to Pay Off Debt

Sep 14, 2011Bryce Covert

While families have made progress paying down credit card bills, mortgage and student debt levels remain stubbornly high.

In the run up to the financial crisis, everyone took on boatloads of debt: banks, corporations, consumers. In the aftermath, most have been eager to pay that debt off and get out from under the burden. Yet some are doing better than others. Corporations are now sitting on cash, having corrected their balance sheets. Banks are faring well after raising capital and selling off assets. But families aren't so lucky.

Households have made some progress in lowering credit card debt. According to TransUnion, consumers spent $72 billion more paying those bills than buying things in 2009 and 2010. In the first quarter of 2011, average credit card debt reached a 10-year low of $4,679. And the national delinquency rate (those who are 90 or more days past due on their credit card bill) was at .6 percent in the second quarter of 2011, the lowest level in 17 years.

Overall, household debt has fallen to 2004 levels. But mortgage debt isn't looking as positive as credit card bills. As the Wall Street Journal puts it:

Until the late 1990s, the sum of all American mortgages was about 40% of the value of the underlying homes. Americans borrowed heavily against their houses and then house prices fell. By this metric, the debt burden rose to about 62% -- and hasn't yet come down. (This is an average, of course... About one in five homeowners with a mortgage owes more than 100% of the current value of the house.)

Part of this, the article explains, is that unlike banks, households can't raise capital to pay it down. So to get housing-related debt levels down, consumers will have to see a rise in price appreciation or an increased ability to writedown or modify their mortgages. That, or they'll face foreclosures.

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And we're doing worse than ever before in another category of debt. Student loan debt is set to hit a total $1 trillion this year for the first time ever. Beyond that hefty load, though, default rates are rising. Overall, 8.8 percent of borrowers defaulted last year, up from 7 percent the year before. It gets even worse at for-profit schools, though, where the rate was 15 percent, up from 11.6. And while they only enroll about 10 percent of the nation's undergraduates, those students make up almost half of the defaults. They also tend to serve low-income students, who may already be struggling with the cost of an education.

But the problem doesn't stop there. In fact, it may be worse than those numbers show. The default rates only take a look at a two-year window -- but some studies show that as few as one in five defaults at for-profit colleges occur in that timeframe. Meanwhile, the New York Times reports:

A recent study by the Institute for Higher Education Policy found that for every borrower who defaults, at least two more fall behind in payments. The study found that only 37 percent of borrowers who started repaying their student loans in 2005 were able to pay them back fully and on time.

Banks and corporations may be feeling great about their debt levels, but they would do well to remember that consumers drive our economy. If we're all still buried under a mountain of debt that we can't pay off, the economy will continue to suffer.

Bryce Covert is Assistant Editor at New Deal 2.0.

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