Americans' Borrowing Hits Another Record. Time To Worry? | KERA News

Americans' Borrowing Hits Another Record. Time To Worry?

Sep 12, 2017
Originally published on September 12, 2017 12:02 pm

Americans owe more than ever before, with household debt hitting a record of nearly $13 trillion. And auto loans, home loans and credit card debt are all still on the rise, according to the Federal Reserve Bank of New York.

That has some economists saying the lessons of the bubble of borrowing in the run-up to the Great Recession have already been forgotten.

The last time borrowing hit a record, the country was in the throes of the financial crisis. That might sound ominous. But the economy is in much better shape now. Home loans — by far the biggest debt category — are made to people who can actually afford them. And much of the borrowing is arguably responsible.

Sasha Gallagher, who lives outside Richmond, Va., says she and her husband have had several major changes in their lives in the past year. They had a baby in February and recently bought a house. They'd spent their savings on a down payment. So they used a zero percent credit card offer to buy things they wanted for their new home: a washing machine, refrigerator and a riding lawn mower.

"We're at roughly $6,000 and it will probably grow because at this point we've got appliances on there but we really haven't furnished the home yet," Gallagher says.

That might sound like quite the credit card buying spree. But, Gallagher says, "we're still driving both of our old beat-up cars basically into the ground, because a house in a good school district is more important than a new car," she says.

More importantly, Gallagher just finished pharmacy school and got a good job. She's gone from being a starving student to being the bigger breadwinner for the family. That means they'll be able to pay off that credit card pretty quickly, she says.

Likewise, millions of Americans have found work in recent years. And spending money keeps the U.S. economy chugging along. So from that perspective, maybe all this debt isn't so bad.

On the other hand, some economists don't like this record borrowing. "The new level of debt is cause for alarm," says Lucia Dunn, an economist at Ohio State University who has been studying consumer debt for more than 20 years. Her research shows that only about half of credit card debt gets paid off each month. And so she says rising credit card debt suggests more Americans are getting stuck paying high interest rates.

"Being in debt is a very stressful way to live," Dunn says. "There's a lot of people who are just in a hole and so stressed out over it. We believe that group is growing."

Sung Won Sohn, an economist at Cal State, also has watched Americans' relationship with debt for many decades. He says all this borrowing has him worried.

"We are beginning to forget the lessons learned from the painful recession in 2007 to 2009," Sohn says. Consumer spending is the largest portion of the economy "and when the time comes for an economic recession, this is going to make the situation worse," he says.

Americans carry about $784 billion in credit card debt and they owe $1.34 trillion on student loans. Gallagher, who just bought the new house, says pharmacy school was not cheap. In fact, she says it's like having a second mortgage, though she doesn't want to say exactly how much she owes.

Still, Gallagher says her degree got her that new job at a pharmaceutical company with a nice paycheck.

Research shows that if you have a college or advanced degree you're much more likely to own a house and earn a higher salary. But another report by the New York Fed shows that rising student debt is becoming a bigger drag on many Americans' finances.

But while household debt overall is at a record high, Sohn says it needs to be kept in perspective. "I don't think this is anything like what we faced in 2007," he says. For one, the systemic risk of financial collapse — which arose when banks were making huge bets on bad mortgages — has faded.

Also, incomes have been slowly rising. So while overall debt is at a new high, it's still a lower percentage of people's incomes than it was when the financial crisis hit.

Copyright 2017 NPR. To see more, visit http://www.npr.org/.

RACHEL MARTIN, HOST:

Americans' overall household debt has hit a record high, nearly $13 trillion and rising, which makes people wonder if we've already forgotten the lessons of the bubble of borrowing in the run up to the Great Recession. Here's NPR's Chris Arnold.

CHRIS ARNOLD, BYLINE: The last time Americans had taken on a record level of debt, we were in the throes of the financial crisis. But the economy's in much better shape now, home loans are being made to people who can actually afford them and a lot of the borrowing is arguably pretty responsible.

SASHA GALLAGHER: My husband and I recently had a baby in February. And we've had a lot of changes in the past year.

ARNOLD: Sasha Gallagher lives outside Richmond, Va. The couple just bought a house. They spent their savings on a down payment. So they used one of those 0 percent credit card offers to buy a whole bunch of stuff for their new home - a washing machine, a refrigerator, a rideable lawnmower.

GALLAGHER: We're at roughly $6,000. And it will probably grow because at this point, we've got appliances on there but we really haven't furnished the home yet.

ARNOLD: That might sound like quite the credit card buying spree, but Gallagher says she hasn't taken leave of her senses.

GALLAGHER: You know, we're still driving both of our old beat up cars basically into the ground because a house in a good school district was more important than a new car.

ARNOLD: And Gallagher just finished pharmacy school and got a good job. So she's gone from being basically a starving student to being the bigger breadwinner for the family. And she says they'll be able to pay off that credit card pretty quickly. Likewise, millions of Americans have found work in recent years. And, of course, spending money keeps the U.S. economy chugging along. So maybe all this debt isn't so bad. On the other hand, some economists don't like this record borrowing. Lucia Dunn is an economist at Ohio State University.

LUCIA DUNN: The new level of debt is cause for alarm.

ARNOLD: Dunn's been studying consumer debt for more than 20 years. Her research shows that overall, only about half of credit card debt gets paid off each month. And so she says that rising credit card debt suggests that more Americans are getting stuck paying those high interest rates.

DUNN: Being in debt is a very stressful way to live. There's a lot of people who are just, you know, in a hole and so stressed out over it. We believe that group is growing.

SUNG WON SOHN: We are beginning to forget the lessons learned from the painful recession in 2007 to 2009.

ARNOLD: Sung Won Sohn is an economist at Cal State. He says he'd like to wave a cautionary flag about all this borrowing.

WON SOHN: Because consumer spending is really the largest portion of the economy and when the time comes for an economic recession, this is going to make the situation worse.

ARNOLD: In addition to all that credit card debt, Americans owe even more on student loans. Sasha Gallagher, who just bought the new house, says that pharmacy school was not cheap.

GALLAGHER: Yeah, I also have, like, a mortgage-worth of student loan payments (laughter). I'd like to not put the actual number on the radio.

ARNOLD: But it's a lot. Still, Gallagher says her degree got her that new job that's got a nice paycheck. Research shows that if you have a college or advanced degree, you're much more likely to own a house and earn a higher salary. But rising student debt is becoming a bigger drag on many Americans' finances. OK, so household debt overall is at a record high, but economist Sung Won Sohn says to keep it in perspective...

WON SOHN: I don't think this is anything like what we faced in 2007.

ARNOLD: For one thing, we don't have the systemic risk of financial collapse that we had back then when banks were making those huge bets on bad mortgages. Also, Americans' incomes have been slowly rising. So while overall debt is at a new high, it's still a lower percentage of people's incomes than it was when the financial crisis hit. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.