A struggling economy will exacerbate debt inequality in America

Jeremy Ney
7 min readJan 6, 2023

64 million Americans have delinquent debt, but some communities have much larger challenges than others

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Debt can help you buy a home.

Debt can help you start a business

Debt can help you go to school.

But debt can be crippling for millions of Americans. 64 million Americans are overdue on debt and are struggling to pay it back.

📈 As interest rates rise, the cost of education increases, and it becomes more expensive to own a home, debt is keeping more and more households in cycles of poverty.

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Texas has the most indebted counties

County-Level Debt-to-Income Ratio, 1999–2022 — Source: Federal Reserve

📍Texas is home to 7​​ of the 10 counties with the highest percent of residents in debt. The other 3 in the top 10 are in South Carolina. Duval County in south central Texas is the most debt-ridden county in America, where 2 in 3 residents there are delinquent on their debt payments. Duval has almost double the national poverty rate and 90% of the population is Latinx.

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“Death Valley” for migrants, or Brooks County, has the next highest rate of debt delinquency in Texas. It’s one of the busiest points for illegal immigrant crossing and it has the highest rate of immigrant deaths of anywhere in the country. For the 90% Latinx population who lives in Brooks, many cannot provide for immigrants traveling through there who may knock on their doors because they themselves are so in debt. Looking after others or extending resources isn’t possible when the population is already struggling under such intense weight.

Simone lives in a tent on her property in Vermont because her debt is so high she needs to rent out her home — Source: The New Yorker

⛺️ Simone Cifuentes knows how crippling debt can be. Simone lives in a tent on her own property in Vermont while she rents out her house to save money. She has $332,000, which is largely split between her mortgage and student loans. She tries to cover debt payments for her father too and largely focuses on paying off the debt that has accruing interest since she knows how those spirals can get out of control. At the beginning of 2014, she had $10,000 in debt, but this grew to $27,000 by the end of the year. That same year she lost her job a week before her birthday. “I’m hoping to go back to teaching full time with no more ‘bad’ debt so I can finally afford to live in my own house” she says.

Good debt vs. Bad debt can mean the difference between opportunity and poverty

Debt becomes a problem when households can’t pay it back.

In 2016, Donald Trump declared himself “The King of Debt”. He argued that he has been successfully using debt his whole life to fund his businesses. While this is possible, bad debt and an inability to pay off that debt will make it very hard to become king.

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💳 Credit card debt — Credit card debt has now reached its highest levels ever, far surpassing levels seen before the 2008 financial crisis. New data just released from the Federal Reserve shows that credit card debt is now at $930 billion, up from $870 billion in 2008. Delinquency rates are also rising. While inflation explains part of this (and prices rising faster than wages), the other side is that money has become tighter as interest rates rise and markets slow down, and so households are extending themselves further on credit cards.

📚 Student debt — 45 million people have $1.5 trillion in student debt (average of $33K each). The issue of student debt has dramatically increased over the past 40 years. College tuition has risen at 4x the rate of inflation and 8x that of household income. More on this below.

🩺 Medical debt — More than half of all overdue debt that Americans owe is related to medical expenses. People living in rural areas and in parts of American that did not expand Medicaid under the Affordable Care Act were more likely to have high medical debt.

🏠 Housing debt — The Federal Housing Association (FHA) guidelines permit a total mortgage payment and any recurring monthly obligations ratio as high as 43% for borrowers. So that means if you’ve got a monthly income of $5,835 (US median) you shouldn’t be spending more than $2,500 on debt repayments each month.

⚖️ Racial divides for debt27% of Black households are delinquent on paying back their debts, while only 15% of White households are delinquent on their debt. On top of this, White households actually have more debt (median $73.8K, compared to median $30.8K for Black households), which is largely due to the much higher rates of White homeownership in America. So Black Americans are struggling to pay back their debts, but often because they are saddled with payday loans and low-income jobs that make it harder to get back above water.

What’s been happening with student debt?

President Biden recently canceled up to $20,000 in student debt for Pell Grant recipients and $10,000 for other borrowers. Student debt is a special challenge because it’s much harder to resolve your student debt through personal bankruptcy than it is for credit card or mortgage debt. Biden’s goal was to support low-income borrowers and resolve debt for Black borrowers as well. There are many arguments for and against Biden’s plan, but if he is able to achieve his goals, this would be a huge step forward for reducing debt and inequality.

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The reason student debt is particularly important is because of 🎭 debt-to-income ratios. High debt is less problematic if those debt holders have higher incomes and can afford to pay back what they owe. Students, however, generally have lower incomes at the beginning of their careers and have higher debts because they are recent graduates (i.e. high debt-to-income ratios, often $2 in debt for every $1 in income). High debt-to-income ratios usually results in higher interest rates, because they are a higher risk to a lender, which can exacerbate debt traps. The Biden proposal tries to target students in this position.

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🏛 Last week, the Supreme Court agreed to hear the case on whether the Biden administration had overstepped its authority in canceling billions of dollars in student debt. The trial has been fast-tracked as states are arguing the executive action could wipe out future tax revenues for them.

The nonpartisan Congressional Budget Office estimates the plan will cost $400 billion.

The Path Forward

Predatory practices perpetuate debt cycles. Payday lenders and loan sharks charge such high interest rates that it can be impossible to pay off those debts. Debt management plans can help households navigate the debt that they do already have. And bankruptcy can help Americans emerge from debt.

  • 🦈 Ban loan sharks in every state — As we’ve previously discussed, 14 states and DC have introduced laws that have banned or effectively banned payday lenders. This has helped reduce debt cycles and made it harder for borrowers to accrue “bad debt” i.e. debt that has exorbitantly high interest rates. The average interest rate in Texas for a $300 payday loan with a 1-month repayment timeframe is 662%. As we just saw, Texas also has some of the highest rates of debt delinquency in the nation.
  • 🪜 Make it easier to enroll in debt management plans Debt Management Plans (DMPs) are proven programs that reduce household debt. State-sanction nonprofits will create a DMP for a household, aggregate that debt, and negotiate lower rates on your behalf. DMPs save around $140 per month and are typically able to negotiate interest rates from about 22% down to 8% on average. However, 62% of Americans don’t know that DMPs exist and those who do know are worried that they’ll never be able to get another loan again because of restrictive rules. DMPs can reduce household debt if we can increase awareness and get rid of rules that make it harder to get credit in the future.
  • 7️⃣ Reduce the hurdles for Chapter 7 bankruptcy — Chapter 7 bankruptcy can be a lifeline for households struggling under intense debt. With Chapter 7, you can most often keep your home and a court will place an automatic temporary stay on your current debts. The court will determine which assets of yours it can sell to pay off your creditors and you’ll emerge from the process debt free in 4–6 months. Chapter 7 is a much more accommodating process than Chapter 13 bankruptcy, however, many courts and law firms disproportionately push low-income and Black families into Chapter 13, despite its more challenging process.

Households have an average of $96,371 in debt. With rising interest rates and a struggling economy, Americans may face more hurdles ahead. However, we can help reduce debt and inequality by focusing on the regions most in need. like Texas and South Carolina, while also recognizing the types of debts that make it harder to achieve opportunity.

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Jeremy Ney

Google, MIT, Harvard, UPenn, Federal Reserve, now writing about inequality at AmericanInequality.substack.com