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 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 made 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.
- 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 includes 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 $65,712, 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 U.S. states has also increased over the years and differs from state to state. States borrow money for education, defense, health care, and welfare expenses and cover budget gaps, unfunded pension commitments, and outstanding bonds. Debts have increased in the states due to spending habits or a decrease in income from taxes and other sources.
States with the Most Debt
1. New York
New York has the highest debt of any state, with total debt of over $203.77 billion. New York's total assets are around $106.61 billion, giving the state a debt ratio of 273.8%. The main culprit for New York's towering debt is overspending on Medicaid. New York has attempted to fill budget gaps by cutting school aid and health care costs in recent years.
2. New Jersey
New Jersey has the second-highest amount of debt in the country. The state's total liabilities total $222.27 billion, surpassing its assets by $198.67 billion. New Jersey's debt ratio is 441.7%. The largest source of debt is the state's unfunded pension and benefits system for public employees. New Jersey legislators are looking toward tax increases because of the state's debt and the growing pressure to fund other priorities such as infrastructure and education.
Illinois has the third-highest debt in the U.S., with total liabilities equaling $248.67. With total assets of $53.05 billion, Illinois has $187.7 billion in unfunded liability. This creates a debt ratio of 468.7%, the largest in the U.S. To pay that off, every person in Illinois's 12.7 million population would need to pay $14,780. Like New Jersey, the biggest problem in Illinois contributing to the debt is billions of dollars for retired government workers' pensions and health insurance benefits.
Massachusetts has the fourth-highest debt in the United States. Massachusetts's total liabilities are $104.53 billion, and its total assets are $34.214 billion, creating a debt of $68.43 billion. Long-term liabilities are at 305.5% of total assets. Massachusetts's largest sources of debt are infrastructure and pensions.
California has the fifth-highest debt of any state, with total liabilities coming out to $362.87 billion. Total assets come out to $301.1 billion, creating a $55.96 billion net debt and giving California a debt ratio of 120.5%. California's debt and liabilities can be broken down into three categories: retirement liabilities, budgetary borrowing, and bond debt. However, combining California's federal, state, and local debt 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
Texas has the lowest debt of any state in the U.S. Alaska's total liabilities add up to $222.64 billion, and its total assets add up to $356.01 billion, giving Texas the highest net position in the country of $115.08 billion. Texas's debt ratio is 62.5%
Florida's debt is the second-lowest in the country. With total liabilities coming out to $66.78 billion and total assets coming out to $163.24 billion, Florida's net position is $97.6 billion. This means that Florida's debt ratio is 40.9%. While Floridas debt has decreased in recent years, it is expected to increase over the next two years.
Alaska has the third-lowest debt and the third-highest net position of $76.74 billion. Alaska's total liabilities add up to $12.65 billion, and its total assets add up to $89.17 billion. Although Alaska does not have a state income tax, its revenue is well-supplied by taxes on oil and gas production.
4. North Carolina
North Carolina's net position is $54.41 billion, making it the fourth-highest net position in the U.S. North Carolina's assets are $78.67 billion higher. Its total liabilities are $23.62 billion, giving a debt ratio of 30%.
Tennessee has the fifth-lowest debt in the U.S., having $8.04 billion in total liabilities and $46.54 billion in total assets, resulting in a net position of $39.3 billion and a debt ratio of 17.3%. 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.