Household Debt: A Growing Challenge for American Families and Federal Policy
Mirroring the federal government's penchant for spending more money than it collects, the American public now has a negative net savings rate. Home prices, medical care, and college tuition are all growing faster than wages, and debt has become increasingly pervasive among American households.These are facts that have not escaped the attention of American consumers, 82 percent of whom now recognize household debt as a serious problem, according to a recent survey sponsored by the Center for American Progress.
What is perhaps most remarkable about personal debt in America is that, while a large majority of Americans recognize it as a problem, the issue is nowhere near the top of the agenda of national policymakers. This is particularly striking in light of the fact that many proposed solutions enjoy significant bi-partisan support. For instance, the Center for American Progress survey found that both Republicans and Democrats (by more than 80 percent margins) agree that:
- there should be more incentives for people to save money,
- lending companies should provide simple and uncomplicated language that explains their charges and fees,
- more education and counseling should be provided to customers, and
- there should be caps on the rates of interest that credit card companies charge.
The Center for American Progress has launched an effort to draw broader attention, especially among lawmakers, to the issue of household debt. At a one-day conference, Debt Matters: Raising The Profile Of Household Debt In America, panel discussions were held to describe the current state of American debt: public attitudes toward it, how payday lenders are harming low-income workers and members of the armed services, and trends and possible solutions to credit card debt.
The range of topics covered by the conference underscores just how far-reaching are the effects of household debt on Americans. Debt hurts low- to moderate-income earners in ways that block their mobility into higher income levels. Debt hurts all (low-, moderate- and even high-income earners) by making it difficult to send children to college and fund retirement accounts. In the case of the former, having fewer college-educated people drags down the economy by limiting productivity and the creation of a highly trained workforce, and, in the case of the latter, a widespread lack of retirement savings could push Social Security into a precarious situation as a larger percentage of retiring Baby Boomers rely on it as a primary source of income.
For many workers at the bottom of the income scale, payday lending often serves as a necessary bridge between the rising cost of living and stagnant wage growth. Payday lenders recognize this fact and, relying on an uninformed customer base, often take advantage of their clients, charging average annual interest rates upwards of 400 percent.
Extraordinarily high interest rates are only part of the perniciousness of payday lending. Many payday borrowers become trapped in a cycle of debt as loans from previous weeks roll over into new loans when they cannot payback the original money borrowed. The Center for Responsible Lending has found that 99 percent of payday loans go to repeat borrowers and 91 percent of payday lenders' business comes from borrowers who borrowed more than five times in a year.
Without access to low-cost lending, many low-income workers have little choice but to continuing paying exorbitant fees and interest rates to lenders praying on poor credit histories and limited knowledge of loan terms. For many low-income families, lack of access to low-cost credit has become a major impediment to accumulating wealth and has severely hindered their chances for economic mobility.
But debt is not just a problem for those at the bottom of the economic ladder. For Americans in the middle three quintiles of the income scale, credit card debt has begun affecting more and more families. In recent years, credit card issuers have been enjoying a surge in revenues. Center for American Progress Senior Fellow Robert Gordon and Associate Director for Economic Policy Derek Douglas, in a recent issue of Washington Monthly, wrote: "From 1996 to 2003, the money credit-card companies make from fees has more than quadrupled, to $7.7 billion."
The authors also assert that fine print and complicated language obfuscate the terms of credit agreements, and as a result many Americans are hit with unexpected fees and increased interest rates on loans and credit.
It's not just the cagey practices of credit card companies that are putting the bite on the middle class. Median household income has failed to keep pace with steadily increasing everyday living expenses like housing, health care, energy, and college tuition. Even those holding four-year college degrees are beginning to feel the pinch. The Los Angeles Times recently reported that workers with four-year college degrees have seen their wages fail to keep pace with inflation for the first time in over 30 years. In fact, these workers have seen their earnings fall 5.2 percent after adjusting for inflation between 2000 and 2004, according to White House estimates.
Unfortunately, taking out larger loans and going deeper into debt is one strategy that Americans have used to deal with this dire situation, and the marketplace has responded accordingly. Lenders have in recent years created more ways to lend money (like interest-only mortgages), increased fees charged to consumers, and insistently advertising their products.
Interestingly, household debt and the national debt have some of the same implications, because their repercussions will extend beyond our current fiscal situation into future generations. While fixing one mitigates the other, fixing both would be a gift to the children and grandchildren of Baby Boomers, the post-World War II babies who are set to retire in a few short years. Without adequate retirement savings, this cohort will rely on Social Security as its primary source of income.
Yet it has been Social Security that has been propping up the federal government coffers by paying for current services with its large surpluses. When the extra revenues from Social Security run out and the program begins to call in loans from the federal government to continue funding benefits, cuts elsewhere in the government will be increasingly hard to avoid - particularly to discretionary programs. Having fewer services and supports for the public in the future will force more families to turn to loans and lending establishments, continuing a destructive cycle of debt.
Obviously, change is in order. Lawmakers and other government officials need to begin paying more attention to the staggering levels of debt American families are being forced to endure. This, perhaps even more so than the national debt crisis, is creating challenges for future generations, but it is a problem that is fixable. The first step toward a solution is a commitment to a national conversation about how and why we came to owe so much money to creditors. Only then can we begin to craft comprehensive policy solutions to this growing problem.