Elderly couple in debt

In the largest annual debt increase since before the 2008 Great Recession, household debt has grown by a whopping $1 trillion in 2021. Inflation, particularly where vehicles and housing costs are concerned, are the chief driver of this growth, according to a report released by the Federal Reserve Bank of New York.

The Senior Vice President of the New York Federal Reserve, Wilbert Van Der Klaauw said in a statement: “The total increase in nominal debt is 2021 was the largest since 2007. The aggregate balances of newly opened mortgage and auto loans sharply increased in 2021.”

These inflationary increases in the price of new homes and vehicle prices contributed greatly to the sharp growth in household debt.

Even though home and auto loans are the chief reason for the sharp increase in household debt, credit card debt grew by $52 billion in the fourth quarter of 2021 alone. This is the largest quarterly increase since the NY Fed began collecting this data, which was over two decades ago. Auto loan balances grew by $15 billion, while mortgage balances increased by $258 billion.

Overall, credit card debt for all of 2021 increased to $856 billion. This is the highest that revolving account loans has increased since before the pandemic.

What this tells economic experts is that with high prices on everything from fuel to utilities to groceries, Americans are utilizing their credit cards to pay for daily necessities. Some of the credit cards charge high interest rates, but consumers are scrambling to keep up.

Student loan balances were also included in household debt calculations. This debt has grown to $1.58 trillion in total, with 2021 alone seeing an increase of $21 billion. Although these figures seem rather large, this is a small annual increase, according to the New York Fed. The saving grace for individuals with this type of debt is the fact that the interest as well as payments have been paused by the federal government since March 2020.

Joe Biden and his administration has postponed the forbearance period for student loans multiple times, including an extension in January 2022. However, payments are set to resume in May. When this happens, borrowers will be responsible for paying a debt that they haven’t had to factor into budgets in nearly two years.

There are some options for those who are dreading the resuming of student loan payments in May. Some may be able to enroll in an income-driven repayment plan (called an IDR) that would limit payments to between ten and twenty percent of one’s disposable income. Borrowers should visit the Federal Student Aid website for more information. Alternate plans involve applying for an addition forbearance, which could last for up to three years if approved via a hardship request. However, most economists suggest refinancing any student debt through a low-interest personal loan.

The chief driver of household debt is the rising cost of mortgages as well as auto vehicle loans. Economists note a record home price growth, which caused homeowners to take out a larger loan in order to purchase a home. Last year, mortgage originations were more than $4.5 trillion in 2021, another historic number.

The Fed is expected to raise interest rates when it meets once more in March; economists say there could be seven interest rate hikes throughout 2022. Some of these hikes may be a quarter of a point or a half-point, depending upon the economic climate and inflation rates at the time. Inflation is up by 7.5 percent as of last week. As gas prices continue to rise due to escalating tensions in Eastern Europe, so do utilities and groceries. Earlier this week, a Labor Department report showed that wholesale prices are up by over nine percent.