The average American debt situation spiraled out of control for numerous reasons. The larger situation impacts each individual in many ways, while each individual’s debt situation feeds into to create the larger problem.

Solving the debt crisis requires each individual working their way out of debt and the government solving the problems that created the crisis. The first step to stop drowning in debt is understanding debt.

Federal Issues Contributing To the Average American Debt

The current debt situation began developing during the Reagan administration when federal funding shifts occurred due to a practical application of party platform differences which effected a paradigm shift in key areas such as student loans.

Student Loans Funding Went Down

The Reagan administration considered higher education a private expense as opposed to a public good. The federal reduction in higher ed funding precipitated a mirrored decrease in state allocations. By itself, this only contributed to the problem though. The reduced higher ed funding dovetailed with a string of recessions. Tuition rates went up while funding went down. This required students to take out larger student loans to pay for their education which contributed to the average American debt.

At the same time, the recessions played with available interest rates. The rates which typically had remained low for student loans increased. Students needed the student loans to afford college. Higher education proves key to improved earnings. Student loans are unsecured debt and, therefore, have higher interest rates.

Since a student must begin repayment on all loans taken out for college shortly after graduation – within months – this created a massive bill for the recent graduate that kept growing since interest continued to be charged after college. The student could conceivably make large monthly payments but remain in debt since the continually accruing interest translated to making no meaningful payments towards the loan principal.

The Rise of Private Colleges

During this same time period, a second paradigm shift occurred, this one in the labor market. In the US, business began shifting from product-oriented manufacturing to service-oriented businesses. The growing popularity of the Internet spurred this on as e-commerce blossomed. As the new online service-oriented economy grew, so did the need for new educational programs. While public run colleges and universities were slow to develop these new programs in emerging areas, for-profit colleges sprang up.

These colleges lacked the same level of oversight as public run universities. They still received federal funding though. Many of these colleges obtained tenuous accreditation and folded after a few years in business or lost their accreditation. The students who attended them now had a massive college loan debt further contributing to the average American debt, a meaningless degree in the eyes of future employers and no jobs. Since private colleges typically have higher tuition rates, the loan debts of these students often topped $200,000 for four years.

Cap this off with the Great Recession of 2008 which brought many of these problems ahead and you have the current federal picture. The 2008 recession caused many individuals to default on their student loans and a solution to that situation has yet to be offered.

Individual Issues

Most Americans do not enter adulthood financially literate. US high schools do not offer classes in basic financial skills. This means that although they obtain the ripe old age of 18 which earns them the right to vote in elections and the ability to legally sign for loans and obtain credit, they do not understand how credit works, how to determine which loan or credit card interest rates and terms offer the best deal or how important timely payments are. They also lack budgeting skills. This has helped create a large debt burden and increase the amount of the average American debt.

The Statistics

The statistics can get pretty scary when considering the average American debt. The average student loan debt in the US is $37,574 with an average monthly payment of $278. The average starting salary of a recent college graduate is $55,260. That translates to $4,605 per month in salary.

The individual still must pay utilities, purchase groceries, purchase a work wardrobe of business attire and pay for insurance on their home or apartment plus a car payment, potentially. Also, factor in the recent graduate’s credit card debt. It is probably pretty significant since most people take out their first credit cards in college. This means the students graduate not only with student loan debt but with credit card debt making the average American debt not so average.

This puts you in a place where the average monthly salary barely covers the costs incurred by normal day-to-day life. The trio of food, clothing and shelter consume a large portion of the individual’s budget. It only takes one small emergency expense to put the recent graduate behind in payments to their credit cards and student loans. That is because with all of the expenses required of the recent graduate, nearly every penny of their earnings goes toward a bill leaving them nothing to put into savings or an investment account.

Potential Solutions To the Average American Debt Problems

Until the government at the federal level undergoes another paradigm shift, the larger problem will continue to exist. However, on an individual level, changes can easily be made starting with financial literacy education and learning budgeting techniques, then applying them.

You can start your financial education here on the Goalry family of websites. At Budgetry, you will learn why budgeting matters and how to budget. At Creditry, you learn why credit cards do not provide the best solution to a money crunch and how to obtain a credit card that does not negatively impact your credit. Using websites like those in Goalry helps you improve your financial literacy. You will learn the basics and advanced techniques for building budgets, credit and, more importantly, turning around bad credit or poor money management.

Turning It All Around

So, what are the key items an individual needs to do to start changing their situation? It is not as complicated as you might think. Take these 12 steps to jumpstart financial health and eliminate your not so average American debt:

Gather your financial paperwork and define your debt. That means write it all down. This builds the big picture for you and lets you examine each account individually. You will need your most recent bill statements for each loan or credit card plus your credit report and credit score. Your debt list should include the creditor name, balance, interest rate and minimum monthly payment for each account. Your credit score and report come in handy down the line so you can check your eligibility for debt consolidation or a lower interest rate credit card or loan.

If you are married or living with a significant other, you both need to be involved in this process. You need to agree on how to solve financial problems and jointly develop a plan to eliminate the debt.

Find a way to make more than the minimum payment. Choose your highest interest debt and pay it off more quickly than the others by making larger payments. Simply paying the minimum payment will not eliminate the debt quickly. It may not eliminate it at all, depending on your interest rate.

Use a debt repayment calculator to help you determine how long it will take to pay off a loan or credit card at different monthly payment levels. This helps you plan how much you need to divert from one budget category to another.

Just as with business and career, setting goals can help you focus on your needs. You need to determine the “why” behind your desire to become debt free. Set a short-term and a long-term goal. Examples of a long-term goal include purchasing a home or car while a short-term goal example is saving for a vacation. Setting the whys for eliminating debt can help you sacrifice unneeded expenses like an afternoon latte.

The most important tool for eliminating debt is a budget. A budget forces you to look at actual numbers and see where every penny really goes.

A line-item budget shows you the exact amount you spend each month on every expense. This is where your credit card bills and your bank statements come in handy. You will see how much you really spend on each budget category each month. This makes it easy to cut out things you do not actually need. One example is that afternoon latte. Another thing people can cut out is cable or satellite television.

Perhaps you have been missing payments or have had late payments. You incurred late fees and that put you further behind in repayment. The solution is simple. Start paying on time. Set up an auto-payment for all of your bills. Also, if you do not already have it, set up auto-deposit for your paycheck.

Paying off debt quickly requires additional income after you have eliminated unnecessary expenses. You can do this by freelancing, taking a part-time job, earning a raise at your existing job or by starting a small business.

Earn cash by selling what you do not need. Things you rarely use or can live without you should sell. The money you make should provide a nice payment to reduce your highest interest rate debt.

Prioritize your debts using one of two methods - smallest to largest debts or highest to lowest interest rate. With the former method, you pay off the smallest debt first, making more than the minimum payment each month. If your credit cards and loans all have low-interest rates, choose the smallest to largest debt repayment method. If your credit cards and loans have some high interest rate cards, choose the one with the highest interest rate to pay down first. Once it has been paid, move onto the next highest interest rate card.

The idea is to motivate yourself by quickly paying down a debt while you pay the minimums on all the others. You provide yourself a psychological boost by paying off a card or loan quickly. Once you see progress, you will make it easier for yourself to stick with your budget.

Maybe you did not know it, but you can call your creditors and negotiate lower interest rates or a reduced debt. You can do this yourself or use a debt reduction service to help you. This applies to monthly costs like your cell phone bill, too. You can change plans or carriers to reduce costs. Other highly competitive industries with monthly costs for the consumer include cable/satellite television, Internet service providers, medical bills and insurance, especially car insurance.

Consolidating your debt lets you regain control by reducing the amount owed through negotiations by the consolidator. You may simply take out a loan that pays off all of your bills, then pay only one payment per month to pay that bill. Either way, you save money because the loan rate typically has a lower interest rate than the high-interest credit card. This is a simple and direct method of reducing your average American debt to next to nothing.

Perhaps you have debt that you cannot consolidate. You can try applying for a balance transfer credit card, so you can obtain a zero percent APR card. This no interest typically lasts for six to 18 months and enables you to move other loans onto it for a small balance transfer fee.

Evaluate each purchase to determine which truly meet your needs and which are frivolous. You can minimize your costs and improve your health by doing things like giving up drugs, smoking or drinking.

The Immediate Benefits Of the First Steps

You can see immediate benefits as you implement the first five or six steps. These help you as you progress down the list. For instance, just six months of paying your bills on time increases your credit score. Once you pay down or pay off a credit card or loan, but leave the credit line open, you have improved your credit utilization score.

The closer to zero your credit utilization score, the better your credit score. That is because your credit utilization score reflects how much of your available credit you currently use. A score of zero means that you have used none of your available credit. A score of 100 would mean you have maxed out all of your credit cards. The latter shows that your debt situation is out of hand.

The better your credit score, the easier it is for you to obtain the items on the latter part of the list. You will get a better interest rate on a consolidation loan or a balance transfer credit card with a better credit score.

Signs You Are Nearing the Debt Breaking Point

Sometimes you will find that your situation far exceeds the normal of the average American debt. When you create your list of creditors and amounts owed, and your budget, you will face your situation head-on and honestly. It might not be pretty. Here are a few signs you might notice that scream it is time to cut up your credit cards and stop spending money.

Final Thoughts

There is no reason to beat yourself up for the debt. It will not help you to do that and, let’s face it, most of America is in the same situation. If you do not have credit cards or loans and are paying your bills on time, congratulations. You are a happy, probably proud minority. If you do have debt, rather than stress over any situation, take action instead.

You can start this minute. Visit Budgetry if you want to start by learning how to budget and how to do so. Visit Creditry if you want to start by learning how to consolidate credit or better manage your existing credit cards and loans.

Start a new stream of income. Reducing bills while increasing income is a sure-fire way to improve your financial situation. You can pay down your debt. You can learn to live within your means. You can do it step by step. Better yet, you can start today.