By Robert L. Cain
Less than a year after the end of World War II, 1946, household debt was less than 15 percent of the US Gross Domestic Product (GDP). Then, in the 1960s, Bank of America, offering the first credit card, BankAmericard (later renamed Visa), sent some 60,000 credit cards out to anyone and everyone in California. Of course, fraud resulted, but that’s not the focus here. Consumer debt problems and debt are. Both are stuck on ever-accelerating up-escalator with no top floor.
Until the 1980s, consumer debt had hovered at 15 percent of GDP or less. Then, just between 1982 and 2000, household debt blew up from 43 percent to 62 percent of GDP. By the eve of the 2008 financial crisis, it peaked at 100 percent. That’s right, we consumers owed as much as the total US economy produced. Then it got “better.” The St. Louis Federal Reserve reported that in the fourth quarter of 2020, it had dropped to 73.38 percent of GDP down from 84,5 percent six months earlier.
So what? That’s all interesting and seems overwhelming, but how does that affect doing business. Those figures misdirect thinking away from a troubling situation. The pandemic played havoc with debt but not in the way we usually think of it. As we reported in March 2021, credit scores have improved because people weren’t paying their debts. Debt is growing, but past due balances are set to current. That’s playing with numbers, playing with data that without further investigation make it look like things aren’t so bad. After all, credit scores are rising, but debt’s increasing. People don’t have work and can’t pay their bills, but that’s all right because they don’t have to. A close examination of who owes what and how it’s not being paid is instructive in that we can see the mushrooming crisis.
Student loans are one example, and the biggest one. Student loan debt exceeds both credit card and auto loan debt at more than $1.6 trillion. Experian reports that “As many consumers aren’t actively paying down their student loans, individual balances grew by 9%, or over $3,000 per consumer, to a record high of $38,792.” That’s per borrower. Because of the pandemic, loans are in forbearance, so borrowers don’t have to pay. But balances keep growing anyway because the missed payments get added back into the loan.
That helps in the short term with the burden of monthly payments going to other bills or to savings. But the debt grew, as Experian pointed out, 9 percent in one year. At some point, the money will come due and the lenders will expect payment regardless of whether borrowers have a job or the income to pay.
The people taking the biggest hits to their indebtedness are Generation Z, 18-23 year olds, and Millennials, 24 to 39 year olds. Gen Z’s average debt increased 67.2 percent from 2019 to 2020 while Millennials appeared “considerably” better at 11.5 percent. That left their parents, Generation X and Boomers seeming to do best at 3.5 percent and 0.3 percent respectively. Gen Z and Millennials don’t owe as much money, but their debt increases at a greater percentage than it does for those who earn more money. As we will see, those figures misdirect and mislead.
Even though the vast majority of the increase in debt for the Gen Z and Millennials comes from student loans, Generation X has “the largest student loan burden of any age group,” reports Experian. That’s because they used Parent PLUS loans for their children. A 2019 study by the Urban Institute, “Reshaping Parent PLUS Loans,” reported that almost one million parents took out one of those loans and those averaged $16,000 per borrower.
Those didn’t hit the college students’ parents’ credit as hard as the younger generation because Gen X has mortgage debt, something that usually far exceeds a mere $16,000 student loan debt. Gen X’s average debt from all sources increased only 3.5 percent to $140,643, reports Experian. Even so, Gen X’s student loan debt alone increased 13 percent in the past year, at a greater rate than that of Millennials.
The big picture is that in the 10 years from 2010 to 2020 total debt grew by 22.5 percent including close to 6 percent in the last year from $14.08 trillion to $14.88 trillion. That’s without much more money being borrowed but simply ploughing itself back into a consumer’s credit but still showing current on credit reports.
Where is this headed and what does it mean for businesses and rental owners? CNN reports that “Federal student loan payments are set to resume on October 1, after an unprecedented 19-month suspension.” You can’t do just one thing. Ripples of any action affect every situation unpredictably but inexorably. Suspending student loan payment just put off the inevitable, the crash of debt. Will the student loan borrowers be able to make the renewed payments? The ones with jobs with salaries high enough to repay will, but how many of those will there be? Will suspended payments be due all at once or added to the end of the loans? We won’t know until it happens.
Then there is the eviction moratorium, set to expire June 30 unless the administration extends it and a judge says it can. At that point, thousands of renters will be evicted. Landlords won’t have to wait because many already have the eviction orders and just need to arrange for the sheriff to carry them out. Many tenants won’t be able to pay current rent plus all back rent so will find themselves and their possessions on the street. People with a job won’t have a place to live, creating a dilemma for employers. Those without jobs won’t be able to rent because they don’t have jobs and have an eviction of their records.
Homeowners may be off the hook for another few months as the Consumer Finance Protection Bureau has proposed extending the foreclosure moratorium until January 1, 2022. Again, we don’t know how that will play out when lenders are once again able to foreclose. Will payments get added to the end of the loan? Will suspended payments be due and payable when the foreclosure moratorium ends? Again, those people with jobs may be out on the streets in spite of the fact that they are earning income. Those without jobs will be scrambling for a place to live.
Regardless of the dates, though, the disaster has been riding the up-escalator for more than a year. Renters, homeowners, and landlords may not be able jump off the too rapidly accelerating debt crisis.