California’s Debt Would Make it Difficult to Survive a Recession, Reports Freedom Debt Relief

 

The Great Recession of 2008 wiped out more than 170,000 small businesses, cost more than 2.6 million jobs, and erased $6.9 trillion in wealth from the stock market. These estimates from the U.S. Census Bureau may not cover the true impact of the recession. Economists didn’t see it coming. Yet, in hindsight, experts can see how the economy had all the right ingredients for a recession of that magnitude.

The economy has made strides toward recovery, but could another recession be on the horizon? It may seem too soon after the previous recession to entertain the thought – after all it ended less than a year ago – but it’s certainly a possibility. If another recession occurs, it could affect California worst of all. In fact, California is one of the states least likely to survive another recession.

What makes Californians less recession-proof than other states? According to Freedom Debt Relief, the largest debt negotiator in the United States, the amount of debt and lack of household savings makes the prospects of surviving another recession pretty grim for Californians. Based in Silicon Valley, Freedom Debt Relief has negotiated over $7 billion in debts for its clients since 2002, and has a unique perspective on the issue.

California residents are carrying a considerable amount of debt - almost 2.35 times more debt than income. That means for every $1,000 in income, residents have $2,350 in debt. In an economic recession, where there’s high rates of unemployment due to layoffs and cutbacks in company spending, residents would face significant difficulty paying off this amount of debt. Many may have to reply on credit to make ends meet or worse, forced into bankruptcy to get rid of the debt burden.

Real estate prices are another factor that contributes to the likelihood that California would have difficulty surviving another recession. California home prices are among the highest in the nation, a factor that’s beneficial during an economic boom. While an improved economy increases the demand for housing, it means houses are selling at higher prices and buyers end up with higher mortgages.

In a recession, home prices drop, buyers who purchase houses during a seller’s market may find it difficult to refinance their mortgage for something more affordable. Many people end up upside down in their home loans – meaning their loan balances are higher than their property value. Californians spend a disproportionate amount of income on housing, which would make it difficult to continue to afford housing with even the smallest upset in monthly income.

We also can’t ignore how credit card debt contributes to financial issues during a recession. “Given the negative impact household debt can have on economic growth and stability, it’s easier to understand how these high amounts of debt could lead to another recession. When household debt grows to a point that families can’t keep up with the payments, spending falls off dramatically,” says a spokesperson for Freedom Debt Relief. “When families can’t afford to pay their loans, they can’t afford to spend money, the economy suffers. And, the result could be particularly painful for many California households.”

Californians are also struggling to deal with student loan debt – with the average graduate carrying $22,191 in student loan debt, according to Make Lemonade. California lawmakers are already looking for a way to help students avoid living with crippling student loan debt. The proposed Degrees Not Debt program would assist University of California and California State University students with tuition and living expenses. Cost of living expenses accounts for 60% of total college costs for students at University of California schools.

The proposal would provide benefits for community college students, too, allowing these students to enjoy their first year tuition free.

Graduates across the nation are grappling with student loan debt. Just four years ago in 2013, student loan debt outpaced credit card debt for the first time in history and is the second biggest source of personal debt in the United States. The only type of personal debt larger than student loan debt is mortgage debt.

Despite, or perhaps because of, flexible repayment plans available from lenders, many students carry the debt for decades. Student loan debt has a reputation for being difficult to discharge in bankruptcy, which makes it difficult for struggling graduates to find relief for the debt.

“Student loan debt is growing exponentially. The amount of outstanding debt doubled between 2007 and 2013, which is a relatively short amount of time,” says Freedom Debt Relief. “Rising tuition costs are partly to blame. Passing legislation to help offset some of the cost would keep students from entering the real world with a heavy debt burden.”

Other states have made tuition-free college proposals. Among those are New York, San Francisco, Oregon, and Tennessee. The Degrees Not Debt proposal differs from many other student debt proposals because it provides students with more assistance with living expenses. The proposal, however, doesn’t cover living expenses for community college students.

With more than 30 bills having been proposed to make college more affordable, legislators are committed to helping students avoid crushing student loan debt.

The savings rate for California households is fairly low. More than 37% of households don’t have enough saved up to deal with an income loss that lasted more than three months, according to a report compiled by Prosperity Now. In the past year, 46% of households failed to set aside any money for emergencies.

Recessions can be difficult to predict – economists didn’t recognize the significance of the 2008 recession until it happened. California residents can prepare for the worst by tackling their debt before it gets out of hand.

“Consolidating or negotiating debt are two options for families dealing with a significant amount of debt. Once the debt is taken care of, families can work on building an emergency fund that can be used in the event of a job loss or other major unexpected expense,” recommends Freedom Debt Relief. “With debt out of the way and a healthy savings, Californians can begin focusing on other long-term financial goals.”

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