\n
![](\"https:\/\/content.fortune.com\/wp-content\/uploads\/2024\/03\/GettyImages-1474183558-e1710509334366.jpg?w=2048\")
<\/p>\n [ad_1]
\n<\/p>\n
After years of managing household budgets through the stress of the worst inflation in a generation, US\u00a0families are increasingly pressured by a different kind of financial squeeze: The cost of carrying debt.\u00a0<\/p>\n
Two years after the Federal Reserve began hiking interest rates to tame prices, delinquency rates\u00a0on credit cards and auto loans<\/a>\u00a0are the highest in more than a decade. For the first time on record, interest payments on those and other non-mortgage debts are as big a financial burden for US households as mortgage interest payments.<\/p>\n The figures suggest a difficult reality for the millions of consumers who are the engine of the US economy: The era of high borrowing costs \u2014\u00a0however necessary to slow price increases \u2014\u00a0has a sting of its own that many families may feel for years to come, especially the ones that haven\u2019t locked in cheap home loans. And the Fed, which meets next week\u00a0for a policy decision, doesn\u2019t appear poised to cut rates until later in 2024.<\/p>\n As monthly debt payments take up more of workers\u2019 paychecks, those consumers are more exposed to potential economic contractions.<\/p>\n And the cost of money affects people\u2019s perception of their own prosperity: A February\u00a0paper<\/a>\u00a0from IMF and Harvard University\u00a0researchers posits that\u00a0the recent high cost of borrowing \u2014\u00a0which isn\u2019t captured in inflation figures \u2014\u00a0is key to understanding why consumer sentiment remains lackluster even as inflation has moderated and businesses are hiring at a healthy pace.<\/p>\n That theory suggests the debt burden could be a drag on President Joe Biden\u2019s reelection bid, with the economy consistently registering as a top concern at the ballot box.<\/p>\n Nikki Cimino, a 40-year-old recruiter living in Denver, said she finally saved up enough to buy a condo last year, but\u00a0missed out on the ultra-low interest rates that had made homeownership more affordable in the early days of the pandemic. Her 5.25% interest rate pushed her monthly payments to $1,650. After a divorce in 2020, she\u2019s shouldering\u00a0$4,000 in credit card debt.\u00a0<\/p>\n \u201cI\u2019m making the most money I\u2019ve ever made, and I\u2019m still living paycheck to paycheck,\u201d she said. \u201cThere\u2019s this wild disconnect between what people are experiencing and what economists are experiencing.\u201d\u00a0<\/p>\n The Fed\u2019s rate hikes, by design, make it more expensive for consumers to borrow.<\/p>\n Since the pandemic, families have taken on debt\u00a0at a comparatively fast rate. According to calculations by Wells Fargo<\/a> economists, it took only\u00a0<\/strong>four years for households to set a new record debt level\u00a0after paying down borrowings in 2021, when interest rates were still near zero. Before that, the time from one debt peak to the next was three times longer.\u00a0And that increased debt load often comes with a higher price. The typical charge on a credit card has climbed to a record above 22%, according to the Fed.<\/p>\n It helps that many families are relatively well-positioned to service that debt: Broad wage gains mean workers are pulling in larger paychecks, and higher home prices have bolstered many\u00a0households\u2019 net worth. While the share of income going to debt service is higher than it was three years ago \u2014\u00a0when stimulus checks were making it easier for people to throw money at their credit card bills \u2014\u00a0it is still low by historical standards.\u00a0\u00a0<\/p>\n And part of the reason some Americans were able to take on a substantial load of non-mortgage debt is because they\u2019d locked in home loans at ultra-low rates, leaving room on their balance sheets for other types of borrowing.\u00a0The effective rate of interest on US mortgage debt was just 3.8% at the end of last year.<\/p>\n Yet the loans and interest payments can be a significant strain that shapes families\u2019 spending choices.\u00a0<\/p>\n \u201cMany consumers are levered to the hilt \u2014 maxed out on debt and barely keeping their heads above water,\u2019\u2019 said Allan Schweitzer, a portfolio manager\u00a0at credit-focused investment firm Beach Point Capital Management.\u00a0\u201cThey can dog paddle, if you will, but any uptick in unemployment or worsening of the economy could drive a pretty significant spike in defaults.\u201d<\/p>\n For Denise and Paul Nierzwicki, credit cards are the only way to make ends meet. The couple, ages 69 and 72, respectively, have about $20,000 in debt spread across multiple cards, all with interest rates above 20%.\u00a0<\/p>\n The trouble started during the pandemic, when Denise lost her job and a business deal for a bar that they owned in their hometown of Lexington, Kentucky, went bad.\u00a0<\/p>\n They applied for Social Security,\u00a0which helped, and Denise now works 50 hours a week at a restaurant. Still, they\u2019re barely scraping together the minimum payments for their credit card debt.\u00a0<\/p>\n The couple blames Biden for what they see as a gloomy economy and plans to vote for the Republican candidate in November. Denise routinely voted for Democrats up until about 2010, when she grew dissatisfied with Barack Obama\u2019s economic stances, she said. Now, she supports Donald Trump because he lowered taxes and because of his policies on immigration.<\/p>\n \u201cWe had more money when Trump was president,\u201d she said, noting that three years ago her credit card debt was less than half of what it is now.\u00a0<\/p>\n The Nierzwickis are not alone in struggling to stay on top of debt. Among middle-class adults with credit card payments, more than a quarter say they\u2019ve been \u201cbehind\u201d at some point in the last year, according to exclusive data from the Harris Poll for Bloomberg News. New York Federal Reserve data shows credit-card balances turning delinquent \u2014\u00a0\u00a0more than 30 days late \u2014\u00a0at an annual rate of 8.5% last quarter.<\/p>\n The high borrowing costs \u2014\u00a0and how households manage them \u2014\u00a0pose some risk to the broader economy.\u00a0<\/p>\n \u201cAs rates rose in 2023, we avoided a slowdown due to spending that was very much tied to easy access to credit,\u201d said Shannon Grein, an economist at Wells Fargo. \u201cNow, credit\u00a0has become harder to come by and more expensive,\u2019\u2019 she said, calling the change \u201ca significant headwind to consumption.\u201d<\/p>\n Mohsin Meghji, managing partner of M3<\/a> Partners, a firm that consults for troubled companies, is girding for the reverberations of that kind of pullback by consumers.<\/p>\n \u201cAny tightening there immediately hits the top line of companies,\u201d said Meghji. For those companies \u2014\u00a0heavily indebted themselves after years of easy borrowing\u00a0\u2014\u00a0\u201cthere\u2019s no easy fix,\u201d he added.\u00a0<\/p>\n Of course, consumers can try to refinance their debt after the Fed lowers rates. But the timeline and magnitude of cuts is uncertain, and refinancing fees can sometimes outweigh the benefit.\u00a0<\/p>\n The return of student loan payments\u00a0is adding to many borrowers\u2019 financial stress.\u00a0<\/p>\n Brittany Walling, a 29-year-old in Columbus, Ohio, has about $80,000 in federal student loans and $20,000 in private debt from her undergraduate and graduate degrees. That\u2019s alongside $6,000 in credit card debt, which she\u00a0accumulated when she was unemployed for a six-month stretch in 2022.<\/p>\n She\u2019s been living paycheck to paycheck, she said, on her $50,000-a-year salary working for the public health department.<\/p>\n \u201cI can\u2019t even save, I don\u2019t have a savings account,\u201d she said. \u201cI just know that a lot of people are struggling, and things need to change.\u201d<\/p>\n For Walling, that sentiment isn\u2019t necessarily going to be a decisive factor at the ballot box. While she said she was disappointed that Biden\u2019s student debt forgiveness plan\u00a0\u00a0was struck down<\/a>\u00a0by the Supreme Court, her views on abortion and transgender rights will likely keep her from voting Republican.<\/p>\n Yet the issue overall looks like a headwind for Biden, as it shapes the economic outlook of people like the Nierzwickis.<\/p>\n \u201cMaybe the Fed is done hiking, but as long as rates stay on hold, you still have a passive tightening effect flowing down to the\u00a0consumer and being exerted on the economy,\u201d said Grein, the Wells Fargo economist. \u201cThose household dynamics are going to be a factor in the election this year.\u201d<\/p>\n Plus, swing-state voters in a February Bloomberg News\/Morning Consult\u00a0poll<\/a>\u00a0said they trust Trump more than Biden on interest rates and personal debt.<\/p>\n Cimino, the\u00a0Denver condo buyer, says despite her debt load, she feels lucky that she makes $65,000 a year and owns a home \u2014\u00a0a situation that leaves her better off than many others.<\/p>\n \u201cBeing middle-class these days,\u201d Cimino said, \u201cis just carrying around a lot of guilt.\u201d<\/p>\n<\/div>\nRelying on Credit\u00a0<\/h2>\n
Student Debt Burden<\/h2>\n