In Parts I and II http://zoomdune.com/article/an-updated-look-at-u-s-indebtedness; http://zoomdune.com/article/student-debt-growth-and-delinquency-causes-concern, we reviewed the current state of U.S. Personal Debt. Our special focus in Part II was Student Debt, which we will touch on briefly here before moving on to Credit Card Debt and Mortgage Loans.
One of the most eye-catching facts uncovered about student loans is the extent to which students, as they are incurring this debt, appear fairly oblivious to the total amount of debt they are building. The Brookings Institution reported on a recent study they conducted that included a survey of first year students at a selective public university. The researchers asked those students what the total cost of their first year of college was (both tuition and essential living expenses). The researchers awarded credit for a “correct” answer if the student came within $5,000 of the actual expense.
Of the students polled, only one half of them managed a “correct answer”!
Therefore, it is not surprising that the researchers discovered that approximately one-half of first year students do not know how much they have borrowed! However, it is quite surprising and worrisome that fully 38% of the students who do have a student loan were not aware that they carry a loan!!! That sounds to many observers as though a large number of students are borrowing blindly – never a good thing!
Needless to say, borrowing now without carefully considering the ability to repay that debt in the future is destined to lead to unfortunate and undesirable consequences.
At that point, one or more readers might suggest that I am being an “alarmist”. After all, the New York Federal Reserve reports that just 11.3% of student loans are delinquent. However, that datapoint is extremely deceptive.
Instead of measuring the percent of delinquent loans vis-a-vis total student debt outstanding, let’s measure the percent on delinquent loans vis-a-vis only those loans that are actually in “Repayment”. [This means that we subtract from “total student loans” all the loans held by students who are currently in school, as well as loans that are in a “Grace Period” — because no current payment is expected or required on those loans.] If we know divide “delinquent loans” by total students loans in repayment — the delinquency percentage zooms up to 18.9%!! I’d call that a negative consequence of “blind borrowing”.
In an ideal world, financial experts suggest that a student should not let future monthly student loan payments exceed 8% of the monthly compensation they are likely to make following graduation.
Moving on to Credit Card Debt, the New York Federal Reserve estimates that there are 410 million credit card accounts in the United States. Dividing aggregate U.S. credit card balances by 410 million results in an average credit card balance (per card) of $2,151.
According to Creditcards.com, each U.S. credit card holder has (an average of) 3.7 cards, which means that among those who carry credit cards, the overall balance outstanding is almost $8,000!
If one performs similar calculations with regard to auto debt and mortgage debt, one arrives at the following estimates of total debt per holder of each form of credit:
$ 10,392 on Auto Loan(s)
$100,197 on Home Mortgage(s)
If anyone becomes overwhelmed by their current debt level, they can seek out a non-profit credit counselor [one possible source is through the National Foundation for Credit Counseling (nfcc.org). Among the suggestions that might be made to assist the credit holder out of debt stress could be:
1) Carry more cash with which to make essential daily purchases instead of relying upon a card;
2) Cut back on discretionary expenses until enough debt is paid down;
3) Pay at least twice the minimum monthly payment for at least 9-12 months; this is particularly helpful since the “extra” amount paid is applied to pay down those balances that are at the highest rates listed in the account.
4) Be confident that as you stick to disciplined spending, your debt will move lower and lower and your financial circumstances will improve!!