The Consumer Debt Scene is providing some interesting numbers. As reported in THE WALL STREET JOURNAL (8/13/14), total outstanding household debt- including mortgages, home equity loans, auto loans, credit cards and student loans- sank $18 billion between April and June to $11.63 trillion.
The decline was attributable to reduced mortgage debt, but with expanding auto loan, student and credit card debt. Student loans increased $7 billion to $1.12 trillion and Credit Card debt increased $10 billion. At these levels, Student loans equate to 10% of household debt and Credit Card equates to 5.7% of household debt.
The major focus of the article was not on the student debt or credit cards – but was on auto loans and mortgage debt. Auto loans expanded by $30 billion in the first quarter – which is good news from the standpoint of the auto industry.
On the other hand, new mortgage loans extended in the first quarter fell $286 billion, which was the lowest since 2000 and ½ the level of the first quarter of 2013.
These facts affirm to me what we’ve been saying for quite a while – it is easy to obtain a car loan, even with sub-standard credit, because banks learned in the financial crisis that people will stop paying their mortgages and credit card debt but will maintain their car payments. As to mortgage debt, the decline is attributable to: (1) tougher underwriting standards, (2) lower wages for young couples and (3) the student loan debt taking young people out of the market from an affordability standpoint.
To me, the significant aspects of this report are that credit card debt increased $10 billion for the quarter and student debt $7 billion. Expansion of credit card debt is good for the economy because it means an increase in consumer spending, which grows GDP and in turn generates jobs. The downside here is that the consumer with the expanding credit card debt is not saving money for retirement and ends up paying high interest (18% to 32%) for years on years, potentially leaving them broker in their senior years.
Fortunately, we can control the downside, because we have proven strategies to eliminate credit card debt for those who find themselves caught in this situation. Student debt, however, is more problematic. Student debt is not dischargeable in bankruptcy and is not something that is easy to settle for less than the debt. Amassing major student loan debt to obtain a degree (or worse when no degree is obtained) that yields a low paying job can be a disaster. We need greater societal reform so that we can educate our children and remain competitive on a global basis in science and technology. Reform appears year away.
For now, I suggest two strategies. First, work while in school and borrow the minimum you need. Second, make sure you borrow from government backed student loans which will qualify for Income Based Retirement programs (‘IBR”), which permit repayment based upon a percentage of earned income for a stated number of years with the remaining balance forgiven. It’s not great, but it is the best of available strategies.
And yes – if you asked me if it would it be better to charge tuition on a credit card, rather than a student loan, I would say, “Yes.” If you can’t figure out why I say this, then you should attend our next seminar!
Enjoy the weekend,