Getting by in today’s economy is tough, as most of the jobs gained since the Great Recession have been in lower-wage sectors.2 Hourly wages have been stagnant for most Americans for years,3 while the cost of living has continued to rise.
Adding debt to the equation only makes matters worse. When working families are earning inadequate wages and have debts like student loans or medical expenses to pay off, something has to give.
Families Out of Balance, the first report in the 2014 Job Gap Economic Prosperity series, examines just what it takes to move beyond living paycheck-to-paycheck in 10 states and in New York City, and just how much harder it can be for low-income families burdened with debt. The study provides an analysis of:
How debt across the nation places a disproportionate burden on low-income households. State-specific living wages — or the amount a full-time worker needs to earn to make basic ends meet — for Colorado, Connecticut, Idaho, Florida, Maine, Montana, New York (without New York City), Oregon, Virginia and Washington state, and in New York City.
A comparison of state minimum wages to living wages, highlighting the tough choices families face to make ends meet.
A review of how different types of debt impact working families provides a reminder of how low-income households acquire debt and how pervasive it is in our society. The stories of working people and those looking for work, meanwhile, illustrate the struggle they face to pay off their debts and the difficult tradeoffs they must make when full-time work does not pay a living wage. Many are forced to make impossible choices — between paying for prescriptions, balanced nutrition and monthly bills, while somehow making debt payments on time.
When working families aren’t making enough to cover the basics of everyday living, businesses ultimately lose out on potential customers. Policymakers must understand this reality if they hope to promote strong families, economy-boosting jobs, and a stable and growing economy.
This study examines the Federal Reserve’s 2010 Survey of Consumer Finances, separated into two groups: “low income,” defined as those whose incomes amount to $15 per hour of full-time income or lower, and “higher incomes,” or those with incomes greater than $15 an hour. This threshold was chosen to represent a highly conservative living wage, as the calculated living wages in eight of 10 states in our study exceed $15 per hour for a single adult. (The living wages in the two remaining states fall between $14 and $15 per hour. Living wages overall are much higher when factoring in children.) Key findings include:
When measuring ability to pay, the low-income group comparatively lacks the resources to handle their debt loads, relative to income. This group bears a disproportionate debt burden.
Low-income households have little to fall back on in case of emergencies, and live on the brink of financial insolvency.
Nine out of 10 low-income households make debt payments a priority.
Low-income households are only slightly less able to keep up with debt payments. Nearly 11 percent of the group reported a debt payment that was more than 60 days past due within the past year, compared to nearly 7 percent of the higher-income group. Nearly nine of 10 low-income households do not report 60-day past-due payments and find some way to make their payments. This demonstrates that, rather than letting debt pile up, these households prioritize paying off their debt, often forgoing other expenses and investments to keep up with their debt loads.
Debt — nearly everyone has it. In the United States, holding some form of debt is almost a given. Be it student loans, credit cards, medical bills underwater mortgages or payday loans, nearly 70 percent of U.S. households hold some sort of debt. In fact, many families end up using one form of debt to pay off another, such as using a credit card or payday loan to pay off medical bills. For workers earning low wages, paying off debt can be a never-ending struggle, as wages don’t pay enough to live without debt, let alone to pay off debt already accrued.
Debt that low-income workers acquire is much greater as a proportion of their income than for higher-income workers, who have a cushion of both income and other wealth to fall back on. But across the country, families are finding that living wages far exceed minimum-wage incomes. And, when you factor in debt, it is clear that our nation’s families are falling short of meeting their basic needs.
A family balance sheet is comprised of income, assets and liabilities. Low-income families are witnessing a steep decline in real earnings, while living wages remain out of reach for many. Ultimately, when off-balance families are unable to gain a firm fiscal foothold, they cannot build a strong financial foundation that allows them to weather financial storms and build for the future.
For decades, many students have had to borrow to finance their education; the theory stood, though, that those loans could be paid off once students graduated. A college degree would assure a secure job with a paycheck substantial enough to pay off loans and provide for a good life. However, as states disinvest in higher education and the gap between available living-wage jobs and job-seekers has remained high, student loan debt has increased, while the ability to pay off that debt has become a growing challenge. We find that higher-income workers have, on average, more than three times the income per dollar in student loan debt than do low-income workers, hampering low-income workers’ ability to pay off their student loans.
In the summer of 2013, the Consumer Financial Protection Bureau announced that total federal student loan debt had passed $1.2 trillion — second only to home mortgage debt. Since the peak of the recession, state funding for higher education has declined nationwide, leaving students to pay more of the total bill for their education. With that decline and colleges facing rising costs, student debt at graduation in 2012 averaged $29,400 per graduate.4
And, as student loans cannot be discharged through bankruptcy, those in severe financial straits who take this extreme step will still be left with suffocating student debt.
With the exception of North Dakota and Wyoming, every state in the country spends less on higher education today than in 2008, and 13 states have cut funding by one-third or more per student.5 Rather than investing in solutions that can benefit the economy in years to come, states’ disinvestment in the public good of higher education has led to increased debt, discouraging graduates from innovative entrepreneurship and reducing their ability to purchase goods to invest in the economy.
In the face of decreased state funding and increased pressure to build new facilities to attract students,6 colleges and universities across the country have increased tuition by an average of 27 percent since the 2007-2008 school year,7 far outpacing inflation.8 Seven states and the District of Columbia have seen four-year public colleges and universities increase tuition by more than 50 percent, including increases of over 70 percent in California, the District of Columbia, and Arizona.9
Once students graduate, paying off their student loans is often easier said than done. While workers saddled with other forms of debt — including mortgage and credit card debt — can restructure their loans or discharge them through bankruptcy, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ensured that “no student loans — federal or private — could be discharged in bankruptcy unless the borrower can prove repaying the loan would cause ‘undue hardship.’”10 With interest rates as high as 6.8 percent for recent graduates (and higher for graduates with older loans)11 and a continuing gap between the number of job seekers and available living wage jobs,12 nearly half of new graduates accept jobs that do not require a college degree and are often low-wage to begin to chip away at their debt. 13
Even more must restrict their other spending14 in order to make monthly loan payments. For example, graduates whose monthly debt payment exceeds 10 percent of their monthly income have a homeownership rate 22 percentage points lower than those without debt or with lower payments.15 (See Figure 1.)
Since 2008, all 10 states covered in this study have decreased funding for higher education; likewise, tuition at public four-year universities in all 10 states has increased over the same period.16 As a result, the average student debt load for graduates has increased since 2008 in all of these states except New York, with more than half of all graduates exiting school with student loan debt.17 18
Households across the United States of all income types use credit cards to pay for at least some of their purchases. Consumers are encouraged to use credit cards to build credit to help with major purchases, such as a car or a home.19 Additionally, many people use credit cards to spread out the cost of other expenses and to pay for emergencies, such as car repairs or hospital visits.20 In 2011, bank credit cards were used for nearly 22 billion transactions at an estimated $2.1 trillion,21 and it is estimated that over 70 percent of Americans have at least one credit card.22
While credit cards can provide the means to pay for emergencies and are often considered a necessary evil to build the credit necessary to purchase a home or car, many consumers do not pay off the full value of their debt each month, leading to interest fees and increased indebtedness. In fact, 56 percent of consumers carried an unpaid balance on a credit card between July 2013 and July 2014.23
A February 2014 survey by Bankrate.com concluded that nearly half of Americans do not have enough cash in emergency savings to pay off their credit card debt;24 on average, about 14 percent of consumers’ disposable income goes to paying off credit card debt,25 though this can vary greatly depending on the amount of debt accumulated. As already noted, most low-income households find some way to make payments on their debt; however, higher-income workers have nearly three times the income per dollar of credit card debt than do low-income workers, stretching low-income families thin. (See Figure 2.)
Nationwide, consumers had average credit card debt of $4,965 per borrow in 2013,26 with 15 percent holding a balance greater than $10,000 and 40 percent holding a balance of less than $1,000.27 Of the 10 states in this study, Colorado has the highest debt per borrower of $5,625, and Idaho the lowest at $4,549.
In 2012, President Obama signed the Affordable Care Act (ACA) into law. In theory, the ACA would ensure that all Americans were covered by medical insurance; however, in practice, not everyone in every state is covered, and even those who are covered can find themselves facing medical bills that are too costly to pay immediately. Life-threatening illnesses, car accidents, or other catastrophes can lead to high bills that even those with good insurance will have a hard time paying; for lower-income workers already stretched thin with high deductibles, even a trip to the doctor for a minor illness can break the bank.
Because not all states are required to accept funds for expanding Medicaid, lower-income workers in the 24 states choosing not to expand Medicaid can end up without insurance. As federal subsidies are based on expanding eligibility for the program, states that do not expand Medicaid will leave thousands of lower-income workers whose incomes fall between Medicaid and subsidy eligibility uninsured and more likely to accumulate medical debt.28 29 As the White House notes, in total, states refusing to expand Medicaid will leave 5.7 million Americans uninsured, including over 1.1 million uninsured in the 10 states included in this study.30 (See Figure 3.)
Even with insurance, though, medical bills can be difficult to pay off immediately, especially if the expense is sudden. In 2012, nearly one in three non-elderly adults reported difficulty paying off recent or long-term medical debt;31 of those, 70 percent had some form of health insurance.32 When health plans have high premiums, high deductibles, or when treatments span multiple plan years, expenses can add up, especially for people with lower incomes.
While payday loans have been around in some form for decades, it was not until the 1990s that payday loan storefronts took off en masse across the country. While payday loans originate from storefronts, many major banks actually provide financing for those storefronts. In fact, a 2012 report found that Bank of America, JP Morgan Chase, and Wells Fargo financed more than 40 percent of the payday loan industry.33
The industry itself is also dominated by a small group of corporations, including six that are publicly traded: Advance America, Cash America, Dollar Financial, EZ Corp, First Cash Financial, and QC Holdings.
Payday loans are pitched as one-time, short term loans meant to help borrowers who find themselves in a tight situation with an immediate need for cash.34 However, with interest rates that are typically well above those of standard bank loans, many borrowers find themselves caught in a cycle of payday loan debt. This is especially true in communities of color, as “the racial and ethnic composition of a neighborhood is the primary predictor of payday lending locations.”35
Most payday loans are relatively small, but the costs can add up. A 2013 report found that the mean, or average loan amount is $392, with an APR of over 300 percent.36 The same report found that the median consumer conducted 10 transactions over a 12-month period, with fees totaling $458, not including the loan principal, and that most borrowers were indebted for more than half the year. For low-income workers who are more likely to take out a payday loan than are higher-income workers, payday loans that are marketed as a one-time fix can “prove to be a debt trap for these families and financially set them back even further.”37
Of the 10 states included in this report, many have implemented laws regulating the payday lending industry. Payday lending is illegal in Connecticut and New York through small loan rate caps and usury limits.38 Montana,39 Oregon40 and Virginia41 have changed their payday lending laws to force lenders to cap interest rates at 36 percent. Other states, such as Washington, Maine, and Florida, have allowed payday lenders to continue to charge their own fee rates, but have capped the amounts that can be borrowed and the number of loans that may be taken by borrowers.42 Idaho remains the lone state in our study that lacks meaningful laws regulating the payday lending industry, and the state faces average annual payday lending interest rates of 582 percent.43 An industry backed law that took effect in July 2014 limits loan amounts to 25 percent of the borrower’s monthly income, but research has found that the average borrower can only afford to pay back a loan of up to 5 percent of their monthly income.44
In recent years, the payday lending industry has revived itself by reappearing online as opposed to storefronts, allowing payday lenders to skirt many state laws, which only regulate physical storefronts.45
States that sought to regulate the industry now find themselves unable to control the lending practices of institutions that carry out their business in the digital and online realm, leaving many low-income workers in those states again at the will of payday lenders.46
While the rate of homeownership by lower-income households is far below that of those with higher incomes,47 housing debt can still affect low-income households.
Housing debt makes up the vast majority of household debt, at $8.69 trillion in the first quarter of 2014.48 Despite the recent housing crisis, owning a home remains a major part of the American Dream; for most, that dream includes taking out a mortgage that will leave the homeowner in debt for years to come, with an average mortgage debt of $156,474.49
Millions of families nationwide have mortgages on their homes, including more than 9 million with mortgages that are underwater, or worth more than the current value of the home.50 Many of these homeowners are in foreclosure, facing mortgage payments that are no longer sustainable.
Foreclosures of homes of low-income families can cause tenuous financial stability to come undone, leaving families at risk of losing their homes and jeopardizing their ability to take care of their basic needs. When underwater homes are rental properties, a foreclosure can jeopardize not only the homeowner — who may or may not be struggling to provide for their other basic needs and costs of living — but can also leave tenants without a home at no fault of their own. (See Figure 4.)
Of the states in this study, most had about 20 percent of mortgages underwater in the third quarter of 2012, and all but two states had average mortgage debt greater than $160,000.51
When families already struggling to make ends meet have debt to consider, as well, often tough choices have to be made of which expenses to cut. For many families, this means cutting meals, not getting new clothes, foregoing savings, and hoping that no emergencies happen that put them even more out of balance, as most low-income families make debt payments a priority over other items in their budgets.
A living wage can help families find balance and find some financial stability. Even with a living wage, though, debt burdens can cause many families to barely get by.
A living wage one that allows families to meet their basic needs, without public assistance, and that provides them some ability to deal with emergencies and plan ahead. It is not a poverty wage. Notably, though, it does not account for paying off debt.
Living wages are calculated on the basis of family budgets for several household types. Family budgets include basic necessities, such as food, housing, utilities, transportation, health care, child care, clothing and other personal items, savings, and state and federal taxes. Living wages for a single adult range from $14.40 per hour ($29,957 annually) in Montana to $19.08 ($39,682 annually) in Connecticut, and $22.49 per hour ($46,771 annually) in New York City. This assumes full-time work on a year-round basis. For a single adult with two children, living wages range from $25.12 per hour ($52,239 annually) in Idaho to $40.48 per hour ($84,208 annually) in Connecticut, and $40.66 per hour ($84,563 annually) in New York City.
State-by-state living wage estimates, as shown in the table below, are as follows. All data assumes full-time work on a year-round basis:
While the narrative has been slowly changing over the past several years, there is still a tendency by many to think of low-wage workers as teenagers or college students earning some extra spending money. As has been noted in past reports,52 though, low-wage workers do not fit this stereotype. Minimum wage workers are overwhelmingly adult workers providing for themselves and their families on meager incomes.
As the Economic Policy Institute has noted,53 88 percent of workers who would benefit from increasing the federal minimum wage are over age 20, and more than one-third are over the age of 40. Forty-four percent even have some college experience. Also, 56 percent are women and 28 percent have children.
Low-wage workers are also disproportionately people of color. A study of 2000 Census data by
UC Berkeley’s Center for Labor Research and Education found that 68.7 percent of Latinos work in jobs that pay $12.87 per hour or less. Among Blacks, 56.5 percent earned low wages, compared to 43.9 percent of Whites.54 In 2012, the median income of American Indians was only $35,31055 — 68 percent of the median income of $51,371 of the entire population.56 In fact, of those who would benefit from an increase in the federal minimum wage, 60 percent are people of color. Because people of color are disproportionately represented in low-wage employment, they have more to gain with a wage increase.57
Federal poverty thresholds, the income limits that the federal government uses to measure whether a person or family is living in poverty, are calculated by multiplying the cost of a minimum food budget by three. When this formula was derived in 1964, it was generally true that food occupied one-third of a typical family budget. Since then, however, living expenses such as housing, gasoline, utilities, health care, and child care have increased much faster than food expenditures. Because spending on food has fallen dramatically as a proportion of all costs, and because the formula for the poverty threshold has not been adjusted to accommodate this change, the federal poverty measure substantially underestimates a family’s basic needs. Many families with incomes above the federal poverty threshold still lack sufficient resources to meet their basic needs.
A family of two, for example, could be earning more than double the federal poverty threshold, but still be making well less than a living wage.
This study found living wages were two to four times greater than the federal poverty guidelines.
The minimum wage also fails to provide a family or individual with a basic standard of living. In the areas covered in this report, minimum wages in 2013 varied from $7.25 per hour, or $15,080 annually (the federally mandated minimum wage, assuming full-time work throughout the year), in Idaho, New York and Virginia, to $9.19 per hour, or $ 19,115 annually, in Washington.
This study found that living wages for a single adult with two children were more than double the minimum wage in 7 of 10 states and three to five times higher than the minimum wages in all 10 states.
Even recent minimum wage increases fail to achieve a living wage. Seattle recently passed a $15 minimum wage within the city, making it the highest in the country. However, that wage is still a dollar less per hour than the state’s living wage for a single adult and only half of the living wage for a single adult with two children.
When families are unable to find work that pays living wages, many are forced to make difficult choices between adequate health care, balanced nutrition, paying bills, and saving for emergencies. For families are also saddled with debt, getting by can be even more difficult. The personal stories in this report illustrate some of the complex issues and choices confronted by households living on earnings below the living wage.
In the pages that follow, this report provides state-by-state findings, determining the living wage for certain household types and putting those numbers in the context of family debt not included in the calculations, as well as comparing living wages to state minimum wages.
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