U.S. households now have as much debt as they had in 2008
By Maria Lamagna
After months of speculation, it happened: Household debt levels in the U.S. have surpassed their 2008 peak.
The New York Federal Reserve released a new report that showed U.S. collective household debt balances totaled $12.73 trillion in March 2017, surpassing the 2008 peak of $12.68 trillion.
This isn’t the first debt milestone Americans have hit recently.
The Federal Reserve announced in April that the U.S. had $1 trillion in credit-card debt. (Consumers hit that number previously in the fourth quarter of 2016, but had eased on their use of revolving credit during January 2017. The Fed announcement showed revolving consumer credit hit more than $1 trillion once again in February 2017.)
While the debt level is similar to 2008, the things Americans are in debt for have changed, as household incomes have increased in recent years, and housing and stock prices have improved.
Compared with 2008, fewer borrowers have housing-related debt — including their first mortgages, or home equity lines of credit — and instead more have taken on auto and student loans.This is backed up by previous research: Student loans have made it harder for younger consumers to buy homes; plus, lower housing prices are also tied to higher student loan default rates.)
The New York Federal Reserve’s report also showed debt delinquencies of 90 days or more have mostly improved since 2008, except for student loans. About 10% of student loan balances are 90 days or more delinquent, according to the New York Federal Reserve’s analysis.
Here’s how the numbers stack up for indebted Americans in 2017: Housing-related debt is down nearly $1 trillion since the 2008 peak, but auto loan balances are $367 billion higher, and student loans are a whopping $671 billion higher, according to the Federal Reserve. (Credit card debt is still down from peak recession levels, and isn’t expected to surpass them until the end of 2019.)
Although housing debt has decreased since 2008, mortgages still make up the bulk of the debt total, at 67%, as of 2016.
Previous Fed studies have shown Americans struggle with their auto debt, which often has high interest rates. The number of subprime auto loans that have fallen into delinquency hit their highest level since 2010 during December 2016. At that time, nearly 6 million people were at least 90 days late on their payments. That is similar consumer behavior to what was seen just before the 2007 – 2009 recession, experts said.
Nearly a quarter of the adults the Fed surveyed in 2016 said they or their spouse purchased or leased a new or used car or truck in the last year. About two-thirds of them took out a loan to do so. And 12% of those who used loans had a longer repayment period than the amount of time they even planned to own the vehicle.
Another trend: Older Americans are taking on a greater share of debt than in years past. Those ages 60 and older held 22.5% of total household debt in the fourth quarter of 2016, compared with 15.9% in 2008 and 12.6% in 2003. Although much of that debt is likely due to mortgages, it’s also possible they are shouldering more student loan debt than in the past, for their children and grandchildren. There were nearly 2 million borrowers between the ages of 50 and 64 who took on “Parent PLUS” loans, the loans the government offers parents, in 2015, up from about 1 million in 2005. Another 200,000 borrowers over the age of 65 also have them.
Credit card debt and auto loan debt balances for people ages 60 and older have also risen since 2008, whereas credit card debt for those 59 and younger has fallen. The Fed, when describing that phenomenon, said lending standards have tightened since the recession, and those who are older may also be more creditworthy.
Although that may make young Americans breathe a sigh of relief, it’s still potentially dangerous, as high levels of debt could mean older Americans don’t have enough money saved for retirement. Indeed, the average American couple has only $5,000 saved for retirement, and only a third of working Americans are saving money in an employer-sponsored or tax-deferred retirement account.
The Fed did find some good news, though. Largely because of tougher underwriting standards for mortgages, the Americans holding debt have higher credit scores than in the past. As of 2016, 41.3% of Americans’ total debt is held by people with high credit scores, above 760. That’s compared with 33.9% in 2008 and 23.7% in 2003. And a smaller share is held by those with lower scores, below 620. Some 13.2% of debt in the fourth quarter of 2016 was held by those with scores below 620, compared with 19% in 2008 and 16.6% in 2003. (Auto loans still have “looser standards,” the Fed found.)
Lending to people who are unlikely to pay debts back can have disastrous effects, from keeping families in debt for years to ruining their credit scores, which makes it more difficult for them to borrow responsibly in the future.