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Household Debt Makes a Comeback in the U.S.

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It took nearly a decade, but debt has made a comeback.

Americans have now borrowed more money than they did at the height of the credit bubble in 2008, just as the global financial system began to fall apart.

The Federal Reserve Bank of New York said Wednesday that total household debt had reached a new peak — $12.7 trillion — in the first three months of the year, another milestone in the long, slow recovery of the United States economy.

The growing debt level shows that many of the millions of Americans who struggled during the recession have sufficiently repaired their credit to qualify for loans. It also speaks to growing optimism among banks and other lenders about economic growth.

Debt can fuel consumer spending, which accounts for nearly 70 percent of all economic activity in the United States.

Yet the borrowing peak also signals potential new risks to the economy.

One of the big drivers of the latest debt binge has been student loans, whose mounting burden can prevent Americans from buying homes or spending on big-ticket items, stifling economic growth.

The fear is that growing debt from student loans — as well as auto loans and credit cards — could put many Americans back in a hole, triggering a new wave of defaults, much like what happened in the mortgage meltdown a decade ago.

“This is not a marker we should be superexcited to get back to,” said Heather Boushey, executive director and chief economist at the Washington Center for Equitable Growth, a liberal think tank. “In the abstract, more debt signals optimism. But in reality, families are using debt as a mechanism to pay for things their incomes don’t support.”

Student loan debt, driven by soaring tuition costs, now makes up 11 percent of total household debt, up from 5 percent in the third quarter of 2008.

By comparison, mortgage debt is 68 percent of total debt, down from 73 percent during the same time period.

Student borrowers today owe $1.3 trillion, more than double the $611 billion nearly nine years ago. About one in 10 student borrowers is behind on the loans — the highest delinquency rate of any type of loan tracked by the New York Fed’s quarterly household debt report.

Unlike mortgages, student loans cannot typically be shed or restructured, which means that more Americans are shouldering a type of debt that could dog them for the rest of their lives, preventing them from buying homes or starting businesses.

“Student debt is a different animal with different rules,” said Diane Swonk, founder of DS Economics in Chicago. “It has some good effects, but not always.”

Alyssa Pascarosa, 26, owes $100,000 for the bachelor’s degree in sociology she received in 2013 from the University of Pittsburgh. The debt shapes nearly all her financial choices. Ms. Pascarosa initially planned to attend law school but got cold feet after realizing that pursuing that career path would double or triple her debt load.

Instead, Ms. Pascarosa moved back in with her mother in Easton, Pa., where she works as a graphic designer.

“I would like to move out at some point soon, but with my loans, I can’t justify spending money on rent,” she said.

Economists have found signs that high student debt levels have contributed to a slowdown in young adults’ household formation and a decrease in early homeownership.

For Nile Arena, 28, the idea of buying a house one day seems well out of reach. Mr. Arena, who graduated from Columbia College in Chicago in 2012 with a theater degree, lives in Bloomington, Ind., with two roommates. After rent and utilities, his payments on $18,000 in student loans are his biggest monthly expense.

There are many benefits, of course, to the boom in student lending. More Americans now have college degrees, which over time is likely to increase job opportunities and wages.

Workers with a four-year college degree significantly outearn those without one, in aggregate, but how that plays out in any individual geographic area and career field varies wildly.

In the end, borrowing money to obtain a college degree often proves to be a better investment than taking out a mortgage to buy a home.

Still, student loans are not the only area of rapid debt growth.

The New York Fed report also shows how growth in auto lending over the last decade had made up for declining mortgage lending. Auto loans totaled about $1.1 trillion, or 9 percent, of all household debt in the first quarter, up from 6 percent in the third quarter of 2008.

Defaults have been creeping up in auto loans — one of the few sectors in which lenders were willing to extend credit to subprime borrowers on the financial margins after the 2008 crisis.

Mark Zandi, chief economist at Moody’s Analytics, said defaults on student and auto loans were a “financial blemish” on otherwise healthy household balance sheets.

“It is not an existential threat to households and the economy,” Mr. Zandi said. “It is an area where there is some stress.”

More broadly, the economic picture looks much less precarious than it did in late 2008. The amount of monthly income that Americans have to spend paying down their debt is smaller, and employment is flush.

Having seen the devastation that the mortgage collapse inflicted on the economy, Ms. Swonk said she was surprised it took so little time for borrowing to return to its peak.

“Given how hard our credit machine was hit, you would expect it to take even longer to restore,” she said.

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