Why are Americans so deeply in debt? It's not because they are using credit cards to buy plasma TVs and premium coffee drinks at Starbucks. The real culprits, according to a new analysis, are the rising costs of housing, health care and education.
The debt of the typical American family earning about $45,000 a year rose 33.1 percent from 2001 to 2004, after adjusting for inflation, according to a study based on data compiled from the Federal Reserve Board's most recent Survey of Consumer Finances. The Fed report, released in February, gave raw numbers on debt levels. The new study analyzed the data more closely to determine the sources of debt. It was conducted by the Center for American Progress, a Washington think tank that describes itself as progressive and is run by former Clinton White House chief of staff John D. Podesta.
Real wages, after adjusting for inflation, have been flat since 2001, according to the study, while the cost of big-ticket items for which families pay the most rose. In the past five years, the costs of medical care, housing, food, cars and household operations rose 11.2 percent, the study said. Many families are trying to make up the difference by borrowing, according to Christian E. Weller, author of the report and a senior economist at the center.
"Very little can be explained by frivolous consumer spending," Weller said. His views were echoed in a news conference by Elizabeth Warren, a law professor at Harvard University who analyzed the sources of debt that emerge in bankruptcy filings and reviewed the results of Weller's study.
"The average American family is walking a high wire and hoping there won't be a high wind," Warren said.
Housing debt has climbed notably because home prices have risen and people have borrowed against the equity in their homes. From 1989 to 2004, for example, the median mortgage debt more than doubled, from $46,900 to $96,000.
Education debt, meanwhile, rose 127 percent between 1992 and 2004, from $3,427 to $7,800. Health-care costs rose, too, because insurance has become more costly and employers are shifting more of the expense to workers.
But the share of income that is going to credit cards has been relatively stable for the past decade, falling from 0.5 percent to 0.3 percent from 1989 to 2004, according to the study, except in the relatively small number of households with significant credit card debt.
Many families, particularly middle-income households, aren't acknowledging that declining incomes mean they must radically adjust their standards of living, according to Weller and Warren. Warren suggested that families that can no longer realistically afford their single-family houses should move to condominiums, consider limiting their families to a single automobile, get second jobs to pay off debt, or move to less expensive school districts that may not have the highest test scores but where children perform acceptably well.
Homes in school districts believed to be excellent sometimes sell for $100,000 more than those in school districts that are merely very good, Warren said, but parents can injure themselves financially in the long term by trying to remain in the most expensive districts.
"Parents need to consider whether a three-point difference in reading scores translates into a wholly different educational experience for their children," Warren said.
At their news conference, Weller and Warren urged Washington policymakers to consider the implications of consumer debt before families are crushed by rising costs and damaged credit. They predicted that otherwise, many families will lose their homes through foreclosure when bankruptcy law changes make it more difficult for households to escape debts.