https://institute.bankofamerica.com/content/dam/economic-insights/growing-debt.pdf
The current state of the American economy, viewed through the Bank of America Institute’s August 2025 report “Where is debt growing?”, reveals a nuanced picture shaped by the interplay of consumer debt levels, job prospects, and generational financial stresses. American households face a rising debt load, but aggregate financial health is buffered somewhat by resilient income, pandemic legacy mortgage rates, and a labor market that has, so far, prevented widespread distress. Nevertheless, regional cracks and generational shifts are increasingly significant for economic policymakers and financial institutions.
Overview: Economic Conditions and Consumer Debt
Household debt in the United States reached $18.39 trillion in the second quarter of 2025—a 1.0% increase quarter-over-quarter. Mortgage balances, accounting for roughly 70% of the total, rose by $131 billion, with credit card and auto loan debt also climbing, though at a slower pace. However, the ratio of debt payments to disposable personal income declined slightly to 11.25% in Q1 2025 from 11.29% in Q4 2024. This remains well below the historical average of 12.52%, indicating reasonable headroom for consumers to borrow more, assuming employment remains robust. Importantly, household debt-to-GDP has steadily declined, and debt service levels have increased primarily due to higher interest rates, not runaway borrowing.
Mortgage Debt: Affordability, Delinquencies, and Housing Market Dynamics
The most significant anxiety in consumer debt is attached to mortgages. The average balance on mortgage loans in June 2025 was 32% higher than the 2019 average, reflecting both surging house prices during the pandemic era and the subsequent rise in interest rates. Many U.S. homeowners are locked into historically low-rate mortgages from the pandemic period, tempering the aggregate debt service ratio. Yet for prospective buyers, increased prices and mortgage rates (expected to remain in the 6.5-7% range through 2026) have sharply curtailed affordability—down 28% since December 2021. As a result, new and existing home sales have slumped 24% and 37% respectively, and regional stagnation is evident, especially in the West, where sales have dropped 43% and delinquencies have spiked.
Delinquency rates for mortgages increased to a seasonally adjusted rate of 4.04% in Q1 2025, notably among newer borrowers exposed to high prices and rates. Early-stage delinquencies—the number of mortgages 30+ days past due—grew fastest in Western states (such as Arizona, Washington, Oregon, and Hawaii), highlighting the disproportionate burden on regions where affordability was most stretched during the post-pandemic buying frenzy.
Student Loan: Resumption, Delinquencies, and Generational Impact
Student loan balances rose by $7 billion in the second quarter, reaching $1.64 trillion. Following the end of the historic education debt payment pause, new delinquencies have exceeded pre-2019 levels, with the most severe impact felt among borrowers aged 50 and over. While Gen Z and Millennials hold the majority of student loan accounts (77%), older borrowers—primarily Gen X, Boomers, and Traditionalists—represent the bulk of those newly falling into serious delinquency (90+ days overdue). This demographic shift could exert downward pressure on consumer spending and card activity, particularly for Generation X, whose spending growth already lags Boomers and pre-Boomers.
Disposable Income and Debt Service Ratios
Despite the steady uptick in debt volume, the typical American household’s debt payment burden relative to income remains moderate. The Q1 2025 household debt service ratio of 11.25% is not only below the long-term norm but also benefits from legacy low-rate mortgages and the extended labor market gains since 2020. Although rising interest rates have nudged debt service upward, the overall debt-to-GDP picture is healthier than in pre-pandemic years, suggesting American consumers have, on average, more capacity to service new debt than in past cycles—if job growth persists.
Labor Market Realities and Job Prospects
Bank of America’s analysis underscores that consumer borrowing would remain sustainable only if the labor market continues to deliver. While participation rates and employment remain high, sectors such as hospitality, transportation, and retail—where debt distress and income volatility are historically highest—are particularly sensitive to any softening economic growth. The link between job security and consumer creditworthiness is unbreakable; further debt growth depends on wage stability as well as job availability. The Institute highlights that any weakening in labor market conditions would quickly erode consumers’ ability to borrow and service debt, potentially precipitating broader economic headwinds.
Regional Crises: The Western States Dilemma
The report presents compelling evidence that mortgage stress is not distributed evenly. The Western United States leads both in declining home sales and in the pace of new mortgage delinquencies. This “lock-in effect”—where homeowners abandon selling rather than accept higher rates and lower affordability—has pushed delinquency rates above national averages even while foreclosures remain generally Lilliputian. The regional divide in household financial health not only complicates macro policy responses but threatens persistent affordability and equity imbalances in the U.S. housing market.
Generational Shifts: Who Bears the Debt Burden?
American debt loads are fragmenting along generational lines. While the sheer volume of student debt resides with Millennials and Gen Z, it is older Americans who are increasingly at risk following the resumption of federal student loan payments. Economic shocks—such as interest rate hikes or job losses—would impact these groups differently, with Gen X facing the dual challenge of high mortgage and student loan delinquencies, and Boomers seeing eroding spending momentum as new delinquencies accumulate. For banks and policymakers, such generational stress points signal strategic challenges: older adults’ reduced spending and increased debt distress may signal slower consumer growth ahead.
Credit Cards, Auto Loans, and Other Debt Components
Credit card debt grew at 2.3% QoQ, outpacing mortgages (1.0%), and auto loans (0.8%). As interest rates remain elevated, unsecured debt becomes a larger risk factor for financial distress, especially among low- and middle-income households. The report notes an increase in early-stage delinquencies for credit products nationally, although these remain below historic averages. Nevertheless, the composition of household debt as seen in 2Q 2025 indicates a slow but steady shift away from secured debt (mortgage, auto) toward revolving and unsecured credit, a pattern that requires careful monitoring as economic conditions evolve.
Implications for Banks, Regulators, and Policy Makers
Bank of America’s analysis, built on its own proprietary and third-party datasets, does not offer alarmist conclusions but rather a measured warning: American consumers have capacity for more debt in the short term, but this depends critically on labor strength, regional housing market dynamics, and generational debt management. Rising household leverage, while manageable in aggregate, contains pockets of stress—Western state homeowners, older student loan borrowers, and new entrants to the housing market. These fractures are masked by steady employment and pandemic-era mortgage rates, but policymakers and banks should prepare for possible volatility if economic or employment conditions change.
Conclusion: Risk, Resilience, and the Road Ahead
The American economy, as seen through the lens of consumer job prospects and debt load, shows resilience but with emerging risks. The capacity of households to shoulder debt, while still favorable compared to past cycles, is now vulnerable to interest rate persistence, regional housing stagnation, and generational debt traumas. Steady income growth and labor market participation are the crucial linchpins; any break in these trends could expose weaknesses that aggregate data cannot conceal. Financial institutions, regulators, and community leaders would do well to focus on these outlier risks—the rising delinquency in Western states, the aging student loan debtor, and the increasingly stretched new homeowner.
Bank of America’s report concludes with a reminder that its dataset offers directional value rather than comprehensive certainty—and that the underlying American ability to “borrow more” is not inexhaustible. Continued vigilance and adaptive policy will be needed to ensure that rising debt is accompanied by sustainable income growth, equitable regional opportunity, and generational resilience, so that the American economy’s current stability is not merely provisional.