A bleak household financial picture

The financial toll on families from the dreadful economy of recent years is enormous. For example, family median net worth -- the difference between gross assets and liabilities -- fell by 38.8 percent from 2007 to 2010, from $126,400 to $77,300. It's at a level last seen in 1992, according to the Federal Reserve report Changes in U.S. Family Finances from 2007 to 2010. In other words, we're back to the levels when Bill Clinton became President, the European Union was created with the signing of the Maastricht Treaty, and Microsoft released Windows 3.1.

There's more bleak news. Family income before taxes was also down. In 2010, median family income dropped to $45,800 from $49,600 in 2007 -- a  7.7 percent decline. The volatility of family income is up.  For instance, in 2010, 25.3 percent of families said their income for the preceding year was unusually low compared to 14.4 percent of families in 2007. In sharp contrast, only 6 percent of families said their income was unusually high, down from 9.2 percent in 2007.

Savings is down, too. From 2007 to 2010, the proportion of families saying they had saved in the preceding year fell, from 56.4 percent to 52.0 percent. Here's the thing: Estimates of the personal saving rate from the national income and product accounts -- better known by the acronym NIPA -- is up from the low 2.2 percent annual savings rate from 2005 to 2007 to 5.3 percent between 2008 and 2010. One reason for the discrepancy is that the savings rates are calculated differently in each report. My own interpretation is that people are struggling to save more with a small measure of success, but that it's really hard to save when when incomes are down and volatile.

What hasn't changed is why people save: emergency savings, retirement and college. The emphasis has shifted slightly over the years, though.


It's good to see that families are cutting down on debts. For example, 74.9 percent of families said they had some kind of debt in 2010, down from 77 percent in 2007. That said, the median value of debt was unchanged from 2007 to 2010.

However, a recent report from the Federal Reserve Bank of New York suggests households have been making continued headway on their debts. In Household Debt and Credit Developments in the first quarter of 2012, the New York Fed says aggregate consumer debt fell slightly.

Specifically, since the peak in household debt in the third quarter of 2008, the debt burden has declined by a combined $1.53 trillion -- excluding student loans -- as of March 31, 2012. 

The rub is student loans. Student loan debt is up with outstanding educational debt at $904 billion. The folks at the Center for Retirement Research at Boston College created a nice chart showing the debt trend lines: 


The student loan trend line is worrisome, especially considering falling family net worth and declining incomes. The college financing system is too dependent on student loans and family resources are increasingly strained. It's an unhealthy dynamic at play.

Of course, federal student loans come with a number of protections, such as deferring or paying off over a longer period of time. For most young college graduates, education will eventually pay for itself. Question is, how much are we handicapping young people with debt just as they are starting out in their careers? Just as households need to move away from emphasizing debt for savings, so too should government transform the college financing system into an equity-based one rather than a debt-based financing scheme. I've written about this before, such as in this Businessweek article.  

About the author

Chris Farrell is the economics editor of Marketplace Money.

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