Cost of Living

Basics, Not Luxuries, Blamed for High Debt

By Kirstin Downey
Washington Post Staff Writer
Friday, May 12, 2006; D01

Why are Americans so deeply in debt? It's not because they are using credit cards to buy plasma TVs and premium coffee drinks at Starbucks. The real culprits, according to a new analysis, are the rising costs of housing, health care and education.

The debt of the typical American family earning about $45,000 a year rose 33.1 percent from 2001 to 2004, after adjusting for inflation, according to a study based on data compiled from the Federal Reserve Board's most recent Survey of Consumer Finances. The Fed report, released in February, gave raw numbers on debt levels. The new study analyzed the data more closely to determine the sources of debt. It was conducted by the Center for American Progress, a Washington think tank that describes itself as progressive and is run by former Clinton White House chief of staff John D. Podesta.

Real wages, after adjusting for inflation, have been flat since 2001, according to the study, while the cost of big-ticket items for which families pay the most rose. In the past five years, the costs of medical care, housing, food, cars and household operations rose 11.2 percent, the study said. Many families are trying to make up the difference by borrowing, according to Christian E. Weller, author of the report and a senior economist at the center.

"Very little can be explained by frivolous consumer spending," Weller said. His views were echoed in a news conference by Elizabeth Warren, a law professor at Harvard University who analyzed the sources of debt that emerge in bankruptcy filings and reviewed the results of Weller's study.

"The average American family is walking a high wire and hoping there won't be a high wind," Warren said.

Housing debt has climbed notably because home prices have risen and people have borrowed against the equity in their homes. From 1989 to 2004, for example, the median mortgage debt more than doubled, from $46,900 to $96,000.

Education debt, meanwhile, rose 127 percent between 1992 and 2004, from $3,427 to $7,800. Health-care costs rose, too, because insurance has become more costly and employers are shifting more of the expense to workers.

But the share of income that is going to credit cards has been relatively stable for the past decade, falling from 0.5 percent to 0.3 percent from 1989 to 2004, according to the study, except in the relatively small number of households with significant credit card debt.

I don't know how anybody affords college any more.