The Federal Reserve Bank of New York released new data this week that shows that US consumers have exceeded $1 trillion in credit card debt for the first time ever. Household debt, which includes mortgages, auto loans, student loans, credit card debt and personal loans, topped $17 trillion. Household debt is another indicator of the impact of low-wage employment.
Yesterday, I wrote about the sharp decline in the US savings rate. Consumers’ failure to set aside adequate savings closely correlates to their household incomes. Half of the households in the lower half of the earnings scale have no savings at all. It stands to reason that when your household income can’t reliably make ends meet, you’re probably not setting aside your badly needed earnings for contingencies.
By itself, debt does not always closely relate to income. Even high-income earners tend to carry some level of debt. According to data the Federal Reserve Bank of St. Louis compiles, the ratio of household debt service as a percentage of disposable income (known as the Debt Service Ratio (DSR)) has declined from its peak of 13.17 just prior to the Great Recession to 9.63 in the first quarter of 2023.
It’s important to note that the DSR dropped by a full point at the beginning of the COVID-19 pandemic. This drop correlates with the suspension of student loan payments. Shortly after this drop, the DSR began to climb again, even though the Department of Education is only now beginning to make plans to restart student loan debt collection. That means US consumers simply replaced their suspended student loan debt payments with other forms of household debt.
Credit card debt replaces student loan debt
In a May 2023 report by the Board of Governors of the US Federal Reserve System, the Fed indicated that the economic well-being of US households declined in 2023 compared to 2022. Forty percent of US households reported spending more money each month compared to their monthly spending in 2022. Twenty-three percent of respondents said their spending increased with no increase in their incomes. One-third of respondents said that their income has increased compared to their income in 2022. Further, fewer than half of adults in the survey said that their monthly earnings exceeded their monthly expenses. This figure is lower than levels recorded prior to the pandemic. In other words, even though employment has returned to pre-pandemic levels, fewer households enjoy income security.
The climbing DSR and the substantial increase in credit card debt make it clear that more households use credit as a substitute for income. Halting student loan payments did not really allow low-income households to get ahead of their debts. These households simply adopted other forms of debt. It remains to be seen how these households will cope with the resumption of student loan repayments and higher levels of household debt.
Whether you look at the problem from the angle of the sharp decline in savings or from the substantial increase in consumer credit debt, these circumstances allude to the same thing: a large portion of American households don’t earn enough income each month to pay their monthly expenses. In that condition, these households will never achieve a meaningful level of financial security.
Community colleges must focus on needs of the community
That’s why it is critical that our community colleges offer degree programs that offer training in high-wage, high demand fields. In the same way they must introduce new programs that support economic development, they also need to regularly eliminate programs that don’t lead to living wage employment.
Instead, they’ve chosen to focus on short-term certificates in a failing effort “to get people into the workplace immediately!” We don’t need a poorly trained, minimally employable workforce, which is exactly what our community colleges are producing. That’s counterproductive for the employers, the workers, and the community. In fact, I will go as far as to say that strategy does more damage than good.
It is time to move past this approach and build a competent, well-educated, and well prepared workforce that is not only capable of doing the work they were initially trained to do, but also to evolve their skill set to anticipate and meet the needs of our economy in the future.
As taxpayers, we do not need to invest in businesses that see no need to invest in our residents. Let the low wage employers find and train their own workers. Our community colleges should focus our tax dollars on capacity building to ensure that our economy continues to grow and prosper over the long term.
Photo Credit: Philip Bouchard , via Flickr
