Relative Debt Increases with Some Possible Benefits

Mounting American debt over 30 years has changed the average family’s balance sheet.

A new report from The Pew Charitable Trusts examines how families hold debt, their attitudes toward it and how it relates to their overall financial health. The lifecycle dynamics of debt can be used to better understand the distinct phases of debt acquisition and debt reduction in families’ lives.

Over the past three decades, one of the biggest shifts in American families’ balance sheets has been the growing use of credit and households’ subsequent indebtedness. In the years leading up to the Great Recession, the average household at the middle of the wealth ladder more than doubled its mortgage debt, according to “The Complex Story of American Debt.”

Although Americans’ debt has decreased in the past six years, housing—which still is the largest liability for most households—and other debt remain higher than they were in the 1990s and student loan obligations have continued to grow, according to the report.

Debt is particularly problematic for low-income households, whose liabilities grew far faster than income after the recession. Their debt was equal to just one-fifth of their income in 2007, but that proportion had ballooned to half by 2013.

Debt may compromise households’ immediate financial security, prevent them from saving, or limit their ability to invest in their own or their children’s economic mobility. But there’s an upside to some types of debt, the report says. Sustainable debt—which allows them to avoid financial emergencies or invest in their futures without putting undue pressure on their present-day budgets—can also be a positive force. Without such debt, many families would not be able to achieve homeownership, obtain college degrees, or start businesses.

Debt’s relationship to the stability of American families’ balance sheets is often unexpected. For the silent generation, those with the least debt are among the most financially secure; among Gen Xers and Millennials, the most financially stable are also those with the most debt.

Among other findings:

  • The rise in debt has not corresponded to a similar increase in household income.
  • Even middle-wealth households held over $7,000 more debt, on average, in 2013 than in 2001 and previous years.
  • Despite these trends, the typical American family still has more assets than debt.