Debt is when money is owed by one party (the borrower or debtor) to a second party (the lender or creditor). Debt is a deferred payment or series of payments owed in the future, which is what differentiates debt from immediate purchases. Debt can either be a useful financial tool or an overwhelming burden depending on the type of debt and how well the borrower handles making payments.
Debt has terms that include interest, repayment and default provisions. Interest is the fee paid by the borrower to the lender. The interest rate is calculated as a percentage of the outstanding principal. Interest rates can be fixed or floating, where the rate changes depending on inflation, and interest rates can compound at specific intervals during repayment periods.
Repayment can be done in three ways: the entire principal balance may be due at the maturity of the loan; the entire principal balance may be spread out over several payments over the term of the loan; or the loan may be partially paid out over several payments during its term, with the remaining balance due as a “balloon payment” at its maturity.
Default provisions are put in place by the creditor in case the debtor fails to meet the legal obligations of the loan. This can include repossession of a house, car or other possessions if the debt was secured by specific collateral.
The average American household has approximately $137,000 in debt. This debt is made up of credit cards, auto loans, student loans, and mortgages. With the increase in the cost of living and the median income at approximately $59,000, debt is becoming a growing issue for most Americans. Most people will find themselves paying off debt for decades or even the rest of their lives.
In addition to personal debts, the total debt by US states has also increased over the years and differs from state to state. States borrow money for education, defense, health care, and welfare expenses, as well as to cover budget gaps, unfunded pension commitments, and outstanding bonds. Debts have increased in the states as a result of spending habits or a decrease in income from taxes and other sources.
States with the Most Debt
New Jersey has the highest amount of debt in the country. The state’s total liabilities total $199.02 billion, surpassing its assets by $132.6 billion. New Jersey’s debt ratio is 279.9%. The largest source of debt is the state’s unfunded pension and benefits system for public employees. Because of the state’s debt and the growing pressure to fund other priorities such as infrastructure and education, New Jersey legislators are looking toward tax increases.
Illinois has the second-highest debt in the U.S. with total liabilities equaling $248.1. With total assets of $53.9 billion, Illinois has $192.4 billion in unfunded liability. In order to pay that off, every person in Illinois’s 12.7 million population would need to pay $15,291. Like New Jersey, the biggest problem in Illinois contributing to the debt is billions of dollars for the pensions and health insurance benefits of retired government workers.
Massachusetts has the third-highest debt in the United States. Massachusetts’s total liabilities are $95.47 billion and its total assets are $29.83 billion. Long-term liabilities are at 275% of total assets or $11,518 per capita. Massachusetts’s largest sources of debt are infrastructure and pensions.
Kentucky has the fourth-highest debt in the country with total liabilities of $54.6 billion. With total assets of $32.67 billion, Kentucky’s debt ratio is about 139%. Estimated unfunded retirement benefits account for more than 80% of Kentucky’s debt, or about $43.3 billion. $11.2 billion is made up of different types of bonds, only $9 billion of which is supported by state budget appropriations. Each Kentucky residents would need to pay over $12,261 per person to get rid of the state debt.
California has the fifth-highest debt of any state with total liabilities coming out to $287.79 billion. Total assets come out to $250.78 billion, giving California a debt ratio of 107.9%. California’s debt and liabilities can be broken down into three categories: retirement liabilities, budgetary borrowing, and bond debt. Combining California’s federal, state, and local debt, however, brings California’s debt total to over $1 trillion. According to this report, the debt would cost each resident of California $33,000 or each taxpayer $74,000.
States with the Least Debt
Alaska has the lowest debt of any state in the U.S. Alaska’s total liabilities add up to $10.75 billion and its total assets add up to $82.07 billion, giving Alaska the third-highest net position in the country of about $72 billion and a debt ratio of only 13.3%. Although Alaska does not have a state income tax, its revenue is well-supplied by taxes on oil and gas production.
South Dakota has the second-lowest debt in the United States with total liabilities equaling $1.14 billion. South Dakota’s total assets equal $7.46 billion, giving it the second-best debt ratio of 14.9%. South Dakota ranks second among U.S. states for fiscal health, with about anywhere between 4.76 and 6.78 times the cash needed to cover short-term obligations.
Nebraska ranks third as having the lowest debt in the United States. Nebraska’s total liabilities are $2.34 billion and its total assets are $14.93 billion, giving Nebraska a debt ratio of 16.4%. Nebraska is one of the country’s most sound economies, having the lowest net tax-supported debt of any state and has the second-highest labor force participation rate.
Tennessee has the fourth-lowest debt in the U.S. having $6.96 in total liabilities and $42.12 billion in total assets, resulting in a debt ratio of 16.4%. Tennessee is one of the most tax-friendly states in the country and will have no state income tax by 2021. While remaining low-debt and low-tax, Tennessee has managed to triple its Rainy Day Fund and provide tax cuts to its residents, including a 30% decrease in state sales tax on groceries.
Idaho has the fifth-lowest debt in the United States. Idaho's total liabilities equal $2,61 billion and its total assets equal $15.45 billion. Idaho's debt ratio is 17%. Idaho has between 3.57 and 4.66 times the cash needed to cover short-term obligations and long-term obligations are below the national average making up 11% of total assets.