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Personal Debt Burdens: A Matter of Interest

Authored by Jose Abuyuan on January 08, 2020

Personal debt burden

Debts continue to figure highly in the lives of many Americans. People across the country owe an average of $38,000 in personal debt alone. In total, they can owe over $137,000. At $9 trillion, mortgages are the largest debt shouldered by American consumers. Today, Americans owe about $4 trillion in consumer debt:

  • $1.5 trillion in student loan debts
  • $1.22 trillion in auto loan balances
  • $1 trillion in credit card debts

The burdens of debt can undercut your ability to recover from financial curveballs. Heavy interest payments are often paired with a reduced earning capacity. Wages have not risen alongside the cost of living. People cannot afford higher monthly payments, which makes them vulnerable to debt traps.

Pigly's Reminder!

Debts can be an alarming thing. Extreme debt issues are considered a key factor in the economic crises of the past decade.

Monthly Masquerade

At the core of America’s issue with personal debt are interest rates. Most people in the United States take on debts from higher-interest sources. Many choose these credit lines based on monthly payments alone.

While this seems tempting, it comes at a heavy price. A low monthly payment, after all, is easier on the pocket. For some people, it might be the only way to afford the debt in the short-term.

Long-term loans have much lower monthly payments but with higher interest rates. Over several years, this interest adds up. You end up paying almost as much interest as your principal (if not more so) over the long term.

The table below outlines the cost difference between a 30-year and 15-year loan term. The rates used are based on the average from November 2019 and assumes a median home price of $226,800.

  30-year Loan Term 15-year Loan Term
Rate 3.75% 3.20%
Down Payment $45,360.00 (20%) $45,360.00 (20%)
Private mortgage insurance 0 0
Points 0.6 0.5
Monthly Mortgage $1,140.28 $1,570.52
Principal $181,440.00 $181,440.00
Interest $121,059.69 $47,253.17
*Total Financing Expenses $123,266.89 $49,460.37
Total Owed $350,026.89 $230,900.37

*The calculation factors in other expenses for its totals. For more information, visit this page.

This was the challenge faced by several homeowners during the eve of the housing bubble. Their homes were worth less than the amount of interest they need to pay on their mortgages.

Moreover, high-interest debts can become toxic if paid with only the minimum. Smaller monthly payments pay only a fraction of the interest incurred. This prolongs the life of the debt and increases your interest burdens. Your first payments may comprise only of interest payments.

College Debt

Price of education can be steep
The price of education can be steep.

Today, college debt represents a whopping $1.5 trillion of the debt burdens of Americans. It comprises 7.8 percent of the country’s gross domestic product.

At the projected rates, experts predict that it could surpass the 10 percent mark in the next five years. On average, a graduate today would owe more than $26,000 in college debts.

For the longest time, college debt was considered good debt. Although it remains this way in principle, reality can make it seem otherwise. College graduates can expect to pay their debts for two decades after graduating.

Good Debt Gone Bad

In theory, college loans are an investment in yourself. They provide you with the means to qualify for higher-paying careers. Once you received a good job, the higher pay grade ensured that you’d make more money than it took to earn your degree.

In the past, a degree guaranteed a decent job. Many students did not seek financial assistance unless they had no other choice. The wages then were often enough to cover the costs of tuition. However, over the past few decades, inflation and other circumstances increased the cost of college life. This left students dependent on financial assistance.

Part of the blame lies on the lack of disclosure and information provided to students. Standard information emphasized in other loans are not discussed in college loans. Too often, students are unaware of the extent of their debt obligations.

The Consequences

Some finance experts have suggested that the college debt issue mirrors the subprime mortgage crisis. Too many loans are being extended to students who cannot pay them back.

In many cities across America, college debt burdens were much heavier than mortgages. Pittsburgh leads the pack, followed by Buffalo, New York, and Cleveland. Data indicates a correlation between housing costs and college debt.

College loan issues has a profound negative impact on lower-income students. These individuals often have trouble obtaining gainful employment even after graduation. The inability to start paying straight away adds to their financial burden. Authors and policymakers alike remain hotly divided over what to do with the college debt crisis at large.

Repayment and Debt Relief

Fortunately, college loans are tax deductible. They can give you some relief in the form of tax breaks. In the meantime, there are several ways to pay back college debts. To pay them on a regular basis is the most cost-effective in terms of interest. Alternatives, like pay what you can, extend the terms of the loan but keep you from defaulting.

For students, there are many ways to reduce the debts you would need to take in. State grants, scholarships, and work-study programs can help you lower your tuition costs. Many students qualify for tuition breaks in both state and private institutions. Do your research and submit as many forms as you can.

Pigly's Tip!

If you’re still in school, you can reduce the impact of your college debts by paying back the amount you do not need. Borrow enough for tuition and your basic needs for comfort. A much lower debt is easier and faster to pay back.

Once you become a parent, you might want to avoid passing on this debt issue to your children. You and your spouse can invest in a 529 savings plan to help fund your children’s education. These plans are tax-advantaged. Their withdrawals are exempt from federal taxes if used to pay for education.


Price of paying big house mortgage
A house too big too liquidate is probably not as good a deal as it sounds.

As of November 2019, the average 30-year mortgage rates in the United States has risen to 3.75 percent. In the meantime, 15-year mortgages rose to 3.2 percent. This change reflects growing optimism in the U.S. economy in the past few years. Despite this, rates remain at historic lows as an incentive for prospective homeowners.

Mortgages vary by terms, rates, and loan types. Most Americans over the past decade chose fixed-interest loans. These offer more security over the long term compared to adjustable rate mortgages (ARM).

Did You Know?

Between 2008 and 2014, 85 to 90 percent of American homebuyers chose fixed-interest loans. Long-term loans are also popular among American homebuyers.

Indispensable Leverage

Very few people can afford to buy property in cash. Mortgages thus remain one of the best ways to make homeownership more accessible. Many homeowners also enjoy the added benefit of avoiding opportunity cost. The price of the home can, with time, surpass the cost of the mortgage. This occurs if you acquired a property before its price rose and gained its appreciated value.

As far as good debts go, a mortgage is only as good as the value of the home its secured with. Over time, mortgages usually cost less than their properties. Regardless of this probability, it is ideal to settle your mortgage before you enter retirement age.

Finally, mortgages are tax deductible. Mortgage payments provide homeowners with a readily available write-off during tax season.

Consider the Down

Lower down payments may also seem like a good idea at first, especially if you are short on cash. Because down payments go to paying off the principal, they help reduce the amount of time it takes to pay off a debt. They also free you from the need to pay for private mortgage insurance (PMI). It is generally a good idea to pay a higher down payment.

As above, the chart below assumes a median home price of $226,800.

  20% Down Payment 4% Down Payment
Rate 3.20% 3.20%
Down Payment $45,360.00 $9,702.00
Private mortgage insurance 0 $15,367.97
Points 0.5 0.5
Monthly Mortgage $1,570.52 $1,595.82
Principal $181,440.00 $217,728.00
Interest $47,253.17 $56,539.73
Total Financing Expenses $49,460.37 $64,117.48
Total Owed $230,900.37 $281,845.48

The Legacy of Crisis

The subprime mortgage crisis of the late 2000s was one of the supposed causes of the Great Recession. This was caused by the growth of subprime lending for mortgages. Incentivized by commissions, many brokers sold mortgages to less-than-ideal borrowers. Things came to head when the housing market peaked in 2006. Many people found that their homes were worth less than their debts and defaulted.

This was a painful wake-up call to the American homeowner, with two key lessons:

  • Avoid subprime mortgages
  • Do not buy “too much house”

Many of these borrowers were spurred to purchase homes larger than they can afford. These were often costly to maintain and didn’t justify the high interest rates.

Buying a house too big for their needs and finances continue to hound many borrowers. Since then, many people have decided to downgrade their homes, which came with its own challenges.

A Lifetime Burden

The American preference for the long-term loan can become a problem. According to the Employee Benefit Research Institute, 65.4 percent of families headed by older adults carried debt. This represents a 10 percent increase since 1992. About 9.2 percent of these families dedicated 40 percent or more of their income to paying off debt.

Pigly's Reminder!

A mortgage can become a financial burden as you approach retirement. Mortgage payments may eat into additional contributions toward retirement funds.

Consumer Debt

Price of paying big house mortgage
Think twice before you charge it.

Today, consumer debts are synonymous with bad debt. Used to pay for discretionary expenses, these debts are used to buy assets that do not grow in value. Car loan balances and credit card bills fall under this category. They are the third and fourth largest personal debts in the U.S., respectively.

Credit Cards

Credit cards are the most accessible form of consumer debt, which are also the most readily abused.

In the first quarter of 2019, 90-day delinquencies reached highs of 8.05 percent for younger borrowers alone. Americans on average owe more than $15,000 in credit card debts. Credit cards have high interest rates and a complex payment system.

The average annual rate for credit cards in the last quarter of 2019 hovered at 17.3 percent. In-store credit cards have even higher rates, with an average of 26 percent.

Inexperience is partially responsible for many credit card delinquencies. The highest percentage of delinquencies come from adults in their 20s. This age bracket comprises individuals who have recently entered the workforce. Thus, they have neither disposable income nor financial discipline to handle credit cards.

A Bad Rap

Do credit cards deserve their reputation for toxic debt? It all boils down on how they are used.

Credit cards only charge interest on balance. Clear the balance before the due date and your debts are paid in full. It’s as if you used a debit card. They also come with rewards points, which when redeemed can save you money on other purchases.

Credit cards also provide protection from identity theft. A cybercriminal can spend the balance of a debit card. This leaves you in a precarious position until your identity is cleared.

Once you’ve reported the theft , credit card companies can cancel fraudulent transactions. This clears you of any other responsibilities and leaves you financially solvent.

Resisting Temptation

The biggest problem with credit cards is that they are easy to abuse. Too many people treat credit cards as the equivalent of cash. This can be a recipe for disaster, especially when shopaholics are concerned. Last year’s holiday purchases could become this year’s nightmare before Christmas.

Pigly's Tip!

If you do pay attention to how you spend, your credit card could become your ally. Make sensible purchases with your credit card so that you can pay your entire balance in full. This way, you avoid interest payments while still earning points.

A Note on Personal Loans

Applying for personal loans is made easier today by fintech apps. Their meteoric growth in the past few years has alarmed some watchdog organizations.

Personal loans can be a financial tool or another ominous liability. This depends on where they are acquired and what they are used for. A personal loan received from a reputable source of credit can have rates lower than those of a credit card. And unlike credit cards, they are only used one time.

Personal loans also do not carry the temptation for overspending as balance-transfer credit cards. But because they are unsecured debts, they are a high-risk proposition for lenders. With relatively high interest rates, they can be a problem for the people using them.

Using personal loans for discretionary spending carries similar risks as credit cards. Thus, it is best to save them for emergencies.

The Return of Frugality

In the days before the Great Recession, frugality was considered a punchline. Thrift was equated with being a miserly or greedy killjoy. The budgeters, though, had the last laugh. Today, the profligate lifestyles of the 2000s are an image of fiscal irresponsibility.

Thriftiness, meanwhile, experienced a comeback among prospective retirees and young people. Benjamin Franklin would be proud of those putting their Benjamins away for a rainy day.

Many millennials today have a cash-only attitude replete with advantages. Only paying in cash can help young people develop the discipline to stick to budgets. It can also be an excellent way to avoid toxic debt issues. After all, you don’t need to pay interest when you pay in cash.

The Drawbacks of Austerity

This tide against debt is a double-edged sword. On one hand, it is a breath of fresh air to see people improve their financial health. They recognize toxic debt for what it is.

Many millennials know the value of cash and debit but neglect to build up a good credit score in the process. The tendency for millennials to forego credit cards is usually contingent on education.

At least one survey found that millennial graduates were more likely to have credit cards than those who didn’t finish. These people also tend to have better credit scores, and a better grasp of responsible credit card use, than students or non-completers.

  Graduates Students Non-completers
Respondents with credit scores 650 and above (%) 70 20 8

The need to have good credit scores is important in securing a prime mortgage. Many frugal millennials have realized this the hard way. Without a good score, you do not qualify for housing and auto loans. You may also be rejected by many prospective landlords.

Combating this paradox is a lot less risky than many people suppose. While consumers are reluctant to use credit cards, they do not have to worry much if they know how to use it. They can also use a securitized credit card, which has many of the advantages of credit and debit cards.

Paydown Strategies

A habit of austerity, however, can be beneficial to your debt reduction plans. Interest payments accrue as long as the principal is unpaid. Using your extra cash toward debts can help whittle down debts much faster and prevent interest payments from piling on. Keeping your credit card on a leash until you’re in the black keeps your debt burdens from growing.

Many people take on high-interest debts because of the more affordable monthly payments. This can be an acceptable trade off in the interim. Over time, you can add extra payments to each of your debts as your income grows. This will bring down your principal and help you reduce your interest payments. Diverting extra cash to your principal reduces the amount of money you owe and the time it takes to clear the debt. Paying more than the minimum on each of your debts can help you reduce your debt burdens fast.

Paying down shouldn’t be your only recourse. Refinancing and consolidation can help you secure lower interest rates. Besides lowering your interest payments, they can also simplify your debt management plans.

Finally, choose a debt repayment plan that eliminates debts in a timely manner. Organize your debts and pay them according to what keeps you motivated. Maybe you prefer easy wins, or maybe you are motivated by savings. Each debt you clear frees you of the burden of interest payments.

For more information, visit this page on how each paydown strategy can work for your benefit.

About The Author

Jose Abuyuan is a web content writer, fictionist, and digital artist hailing from Las Piñas City. He is a graduate of Communication and Media Studies at San Beda College Alabang, who took his internship in the weekly news magazine the Philippines Graphic. He has authored works professionally for over a decade.

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