Report: Americans Are 'Drowning in Debt'

America's middle class is drowning in debt," according to a new report from the Center for American Progress.

The "Drowning in Debt: America's Middle Class Falls Deeper in Debt as Income Growth Slows and Costs Climb" report found that between 2001 and 2004 debt for a middle-income family earning $45,000 increased by 33.1%, even after adjusting for inflation.

Debt relative to income rose even more, to 33.9%, during this period for middle-income families, according to the Federal Reserve.

Moreover, personal bankruptcies among these households also increased, due to slow income growth between 2001 and 2004, compared to the rising cost of the largest family expenses such as housing, education loans, medical expenses and transportation, family budgets have lower buying power.

"Greater debt levels are pushing families closer to the brink," said CAP senior economist and author of the report, Christian E. Weller. "If anything goes wrong, they fall faster through the cracks than in the past."

The report suggests that a common inaccurate assumption is that the growth in debt among middle-income families with incomes of $25,000 to $70,000 a year results from over-consumption, or credit card debt, while data show it is "primarily due to heavier borrowing for investments in homes or education, both of which saw dramatic price increases in recent years." The cost of a college education, for example, went up by 26.3% between 2001 and 2004.

Despite low interest rates, debt payments surged to new highs. In 2004, the typical family spent more than 18% of its income on debt payments - the largest share since the Federal Reserve started collecting these data.

The share of heavily indebted households continues to rise. The share of households with debt payments greater than 40% of income rose from 12.8% in 2001 to 13.7% in 2004.

Data for 2004 show that typical middle-income families dedicated 20% - or the second largest share of their income - to debt payments. Also, the share of middle-income families with debt payments greater than 40% of income rose the fastest among all income groups.

Many families were forced to take on more debt than in the past because of weak income growth, while housing and education costs continue to rise.

SNAPSHOT: Typical Family's Debt

Typical Debt Burden 20% of Income

Share Paying More than 40% 13.7% of Middle Class

SOURCE: Center for American Progress (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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