Federal Reserve: U.S. consumer debt default rate soars to highest level in nearly a decade

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The Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit released on Tuesday showed that in the fourth quarter of last year, the percentage of overdue household debt in the United States rose to 4.8%, the highest level since 2017, mainly driven by rising default rates among low-income groups and young borrowers.

Although overall, the proportion of loans in some stage of default remains close to the pre-pandemic average, the rise in delinquencies among the lowest income groups further indicates that the U.S. economy is exhibiting increasingly divergent characteristics.

Household debt includes mortgages, credit card loans, and so on. The increase in defaults is mainly driven by overdue mortgage loans.

New York Fed researchers found that mortgage delinquencies are particularly prominent in low-income zip code areas. In addition, researchers noted that student loan delinquencies surged sharply after repayment requirements, which were suspended during the pandemic, resumed, further pushing up overall default rates.

Wilbert van der Klaauw, an economic research advisor at the New York Fed, said in a press release issued with the report: “As household debt levels grow slightly, mortgage delinquencies continue to rise. Overall, mortgage delinquencies are near historically normal levels, but deterioration is mainly concentrated in low-income areas and regions where house prices have declined.”

The report shows that the balance of household debt rose 1% from the previous quarter to $18.8 trillion. Among this, at least 90 days overdue credit card loan balances rose to 12.7%, the highest level since the first quarter of 2011; severely overdue auto loans increased to 5.2%, close to the record high set in 2010.

Researchers added that the deterioration in debt repayment ability among low-income and young borrowers aligns with still elevated unemployment rates among certain groups. The unemployment rate for people aged 16 to 24 was 10.4% in December, close to the highest level since the worst period of the pandemic in 2021.

In the fourth quarter, about 16.3% of student loan debt was in delinquency, marking the largest single-quarter increase since data records began in 2004.

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