Drowning in Debt

America's Middle Class Falls Deeper into Debt as Income Growth Slows and Costs Climb

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America’s middle class is drowning in debt. A typical middle income family earning around $45,000 a year saw its debt burden grow by 33.1% between 2001 and 2004, even after adjusting for inflation. Debt relative to income rose even more, to 33.9%, during this period for middle income families. Personal bankruptcies among these households are rising steeply.

The reasons for greater economic distress among middle class households are not hard to pinpoint. Slow income growth between 2001 and 2004, the last year for which complete data is available, has not kept pace with the rising cost of big ticket items such as housing and education loans, medical expenses and transportation. Family budgets have been squeezed.

A common but misplaced assumption is that the growth in debt among middle-income families — those with incomes roughly between $25,000 to $70,000 a year — is the result of over-consumption through increased credit card debt. Rather, growth in debt is primarily due to heavier borrowing for investments in homes or education, both of which saw dramatic price increases in recent years. The cost of a college education, for example, grew by 24.6% between 2001 and 2004, after adjusting for inflation.

Specifically, this report by Christian Weller, Senior Economist at the Center for American Progress, finds:

Debt has expanded by 30.3 percentage points to 108.4% of income — the first time since the Federal Reserve started conducting this survey that debt exceeded income (See Figure A).
Despite low interest rates, debt payments surged to new highs. In 2004, the typical family spent more than 18% of its income on debt payments — the largest share since the Federal Reserve started collecting these data.
The share of heavily indebted households continues to rise. The share of households with debt payments greater than 40% of income rose from 12.8% in 2001 to 13.7% in 2004.

The data illustrate a more pronounced story about the economic situation of America’s middle class. In 2004, for example, the typical middle-income family dedicated the second largest share of income for debt payments (20%) relative to other income groups. And among middle income families, the share of families with debt payments greater than 40% of income rose the fastest among all income groups (3.2 percentage points from 2001 to 2004).

This growth in debt has been fuelled largely by loans for housing and education at a time of weak income growth. Households were caught in a bind that could lead them to take on more debt than in the past.

Read the full report (PDF)