Education expenses problem and its consequence

 Education expenses were the fastest-growing category during this period, growing at over 2.5 times the rate of inflation from 2000 to 2010. And education costs were growing at a time when families were placing more emphasis on the value of a college degree. Most Americans view a college degree as “absolutely necessary” and the average in-state tuition has doubled in the last 25 years, creating an expense that is equal to almost 20% of a family’s pre-tax income (Warren & Warren, 2004). For more information, see the student lending chapter of State of Lending. Medical expenses have increased at twice the rate of inflation and have the potential to wreak havoc on household finances because they often are unexpected. 

In their study Unfairness in Life and Lending, Harvard researchers find that more than half of all low- and middle-income households attribute a portion of their credit card debt to medical expenses and that 60% of bankruptcies are medically-related. Together, increases in the costs of medical care, education, and housing/utilities took up a larger fraction of household expenses in 2010 than they did in 2000 (see Figure 6). This has caused households to adjust and reduce their spending in other areas, such as clothing, housewares, entertainment, dining out, and personal care.3 One consequence of the increasing costs of maintaining households has been that household formation has declined and the practice of households doubling-up, or living with friends, extended family, or other non-relatives due to economic hardship has increased over 50% from 2005 to 2010 (National Alliance to End Homelessness, 2012).

Declining Assets While the majority of household expenses are covered by wages and social security or other retirement income, households also may rely on their assets to help meet financial obligations. This may include financial assets such as stocks, bonds, checking or savings accounts, and various forms of retirement accounts, as well as non-financial assets, such as a home or an automobile that can be sold or liquidated in some other way (e.g., through a home equity line of credit) in order to cover household obligations. 

Data show that the recession depleted household assets. University of Michigan researchers found that households lost value in their homes and other financial assets and also used financial assets to deal with income loss (Stafford, Chen, & Schoeni, 2012). A review of the asset data in the Survey of Consumer Finances shows the same pattern. Figures 7 and 8 show the trend in asset holdings and the median value of held assets for the years 2001, 2004, 2007, and 2010. The data show that inflation-adjusted financial asset values have declined sharply since 2001, from $34,400 to $21,500, with the two declines from 2001 to 2004 and from 2007 to 2010 representing the largest percentage and absolute declines in financial asset values since the survey began in 1989.

Increasing Levels of Debt In the face of falling incomes, increasing expenses, and declining asset values, American households have responded in two ways. First, they reduced their spending: In inflation-adjusted terms, the average spending of households with incomes in the middle quintile of earners declined by 5% from $43,200 in 2000 to $41,200 in 2010 (BLS, 2000-10). Second, households took on additional debt. Figure 11 shows that median household debt values increased from 2001 to 2007 and then remained flat from 2007 to 2010.

Much of the increases in debt burden in the decade came in the form of larger mortgages, as the cost for new homes climbed between 2000 and 2007. Figure 12 shows increases in mortgage debt and the size of those mortgages between 2001 and 2004. The increases from 2001 to 2004, both in the percentage of households with mortgages and the median value of those mortgages, are the largest documented three-year increases since the Survey of Consumer Finances began in 1989. And while home values declined from 2007 to 2010, the value of the mortgages remained high, eating away at the net worth of American families.

Another area where debt has increased dramatically is student loans. In 2001, one in eight households had an educational installment loan. By 2010, one in five had such a loan. Over that same period, the median size of those loans increased from $9,700 to $13,000. That student loans and mortgages accounted for much of the rise in debt levels from 2001 to 2010 is unsurprising. Families chose to incur the kinds of debts that they reasonably expected to pay off in the form of increased future earnings from college degrees and increased home values and equity. The ongoing employment and housing crises mean that these investments have yet to pay off for many who made them. This holds particularly true for those in younger generations. Research by the Pew Research Center, for example, confirms that while student indebtedness has increased for all age groups since 2004, it has risen most sharply for households headed by someone under the age of 44 (Fry, 2012)

While student loans and mortgages are areas where households increased their levels of debt, families have deleveraged in other areas in the years since 2009. As Figure 14 shows, fewer households had credit card balances in 2010 than in 2001. In fact, fewer households had balances than at any other time since before 1989. The size of consumers’ credit card balances also decreased between 2007 and 2010, the only decrease since 1989.

Although the credit card deleveraging occurred because of the financial crisis, Figure 15 shows that the deleveraging of auto loans began earlier in the decade, as households responded to their deteriorating income situations by buying used cars instead of new ones and holding onto their cars for longer periods of time (Krishner, 2012). More information about auto lending and auto lending abuses can be found in the Auto Loans section of State of Lending

Declining Wealth The financial health of American families deteriorated from 2000 to 2010 as result of the declining real income, increasing expenses, declining asset values, and increased mortgage and student loan debt. Household net worth is a useful measure of the financial health and capacity of American families. Figure 16 shows that median family net worth increased for all families each threeyear period from 1995 through 2007 and then decreased in 2010 to pre-1995 levels. While the Survey of Consumer Finances (used in Figure 16) provides limited data with which to compare declines for non-white households, the Pew Research Center used different data sources and found much larger declines from 2005 to 2009 in net worth for African-American (53% decline) and Hispanic (66% decline) households relative to white households (16% decline). Pew also found that the decline in wealth from 2005 to 2009 resulted in the largest documented wealth gaps between African-American and white households and between Hispanic and white households since the Census Bureau began publishing wealth estimates in 1984 (Kochhar et al, 2011). These data reveal that the recession and slow recovery have led to declining net worth for the average U.S. household and a disproportionate decline for African-American and Hispanic households.  

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