| March 11, 2016

Research of the Week: Household Debt Tops $12 Trillion

Debt levels are just shy of the record highs seen just before the market crash.

Each week, Consolidated Credit searches for financial research that can help you deal with your debt and budget. This week…

The interesting study

The Federal Reserve of New York related a report showing how household debt has climbed to $12.12 trillion as $51 billion in debt was accumulated in the fourth quarter of 2015.

The big result

Juggling debt is a necessary skill

With total U.S. household debt over $12 trillion, it equates to about $40,000 in debt per household.

The fascinating details

The really troubling news about this debt level is that it’s just 4.4% shy of the record-high debt level of $12.68 trillion seen in 2008. While mortgage debt makes the biggest portion of the total debt reported, the most significant increase in the last quarter of 2015 was from student loan debt.

In fact, while mortgage debt makes up 68% of the total debt in the United States, mortgage debt actually declined by $11 billion in the last quarter of last year.  Meanwhile, student loan debt increased by $29 billion and credit cards and auto loans contributed $19 billion each. Additionally, more than one in ten (11.5%) of student loans were more than 90 days late or entirely defaulted.

What you can do

It’s no secret that student loan debt is causing a personal debt crisis for millions of Americans. So if you’re carrying student loan debt then your main focus should be to eliminate it as quickly as possible to get it off your financial plate once and for all.

One important thing to note is that federal student loan consolidation programs can be used for several purposes. Three of the five programs are designed to lower your monthly payments to make it more affordable to pay back, but they increase the term of your student loans from 10 years to 25 years. That means your student loan debt will be hanging around and potentially holding you back for more than two decades.

By contrast, the other two programs are designed to pay off student loan debt as quickly and efficiently as possible. The Standard Repayment Plan offers the fastest loan payoff, while the Graduated Repayment Plan starts with lower payments, then increases the monthly amount gradually every two years so you can ramp up to faster elimination as you advance in your career and gain income.

With that in mind, if you can find a way to afford to pay off your loans quickly, it’s really in your best interest. Student loan debt is one of the few kinds of debt that can’t be discharged by bankruptcy. That makes it a good candidate to prioritize in your debt repayment strategy. Of course, you have to find a way to make that strategy work within your budget.

One thing you can consider if you have high balances of several different types of debt is coming up with a debt repayment strategy that eliminates debts that have a high a potential to cause issues like student loans should be eliminated first. So here are some tips:

  1. Start by reducing the costs of your other debts as much as possible.
    1. You can see if you qualify under HARP or HAMP for refinancing or mortgage modification. These federal programs can reduce your mortgage payments and you often don’t face downsides that you usually get with refi programs, such as closing costs.
    2. If you have outstanding auto loans, look into refinancing options to see if you can reduce your payments for that debt as well.
    3. For credit card debt, look into options for debt consolidation. Debt consolidation can roll all of your unsecured debt payments into a single monthly payment that’s often lower than what you pay on all of your debts individually. For example, consumers who enroll in a debt management program to consolidate typically see their total monthly payments reduced by 30-50 percent.
  2. Once you reduce the payments as much as possible on your other debts, revisit your budget as well to see if you have any spending leaks that can be closed. A spending leak is anywhere you’re hemorrhaging money because you’re not being diligent. This can be caused by actions like dining out too much or overspending on entertainment or having multiple streaming media accounts that overlap. Close those leaks and you increase cash flow in your budget.
  3. Then, once you have as much cash flow freed up as possible, look into the two student loan consolidation programs that pay off your debt fast. If you can afford it in your monthly budget, Standard Repayment is the way to go for efficient debt repayment.

The strategy above is just one way you can prioritize debt payments to eliminate the debt that you need to cut quickly without risking your financial stability or damaging your credit. Of course, every financial situation is different. If you need help crafting a strategy for debt elimination that works for your personal financial situation, call Consolidated Credit today at or complete an online application to request a free debt and budget analysis with a certified credit counselor.

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