The Misery Multiplier: Debt Owed To Family And Friends

Misery loves company or so the saying goes. In the current recession, it is more accurate to say that misery creates company. Millions of households struggle amid the onslaught of rising health care risks, growing childcare costs, and a deep recession with massive job losses. Many of them borrow money from families and friends, to help pay for everyday expenses.

Some people may have expected that these economic hardships would pass relatively quickly, and they would be able to pay back any borrowed money. Yet things will likely not improve anytime soon, as the recession lingers, virus cases surge, the labor market slows, and the federal government only offers limited assistance. Families will have trouble repaying money they borrowed from families and friends. Their economic pain could then spread throughout communities, their misery multiplying in families and neighborhoods.

Families are desperate in an economy where their finances are under daily attack. The total number of jobs is still 9.8 million below where it was in February, before the pandemic took its toll. The pace of job growth has slowed, as virus cases have surged throughout the country. Many layoffs have turned permanent and long-term unemployment is rising again. At the same time, families face higher costs for health care, as the novel coronavirus cut a path of physical devastation through families and communities. Childcare costs also mounted for families when childcare centers closed and schools moved to remote learning.

Assistance from the federal government has been insufficient to meet the many needs of millions of families. Congress enacted the CARES Act in March 2020, providing one-time payments to families and expanded unemployment insurance benefits to those who had suffered a layoff early in the pandemic. But the recession lasted longer than government benefits. Extra unemployment checks ended in July, while the labor market recovery slowed. And congressional action in December 2020 to provide more financial relief to families fell short of what people really needed.

Families increasingly borrowed money just to pay their bills. Often, families and friends provided that extra money. Calculations based on Census data show that 13.1% of all families borrowed money from family and friends to pay their daily expenses in November, up from 11.4% in August 2020. The respective shares are much larger among Black and Latinx families, younger families, and those without a college degree. For example, 24.6% of families without a high school degree borrowed money from family and friends to pay their bills. Families leaned on their relatives for help because they did not have any savings and banks had tightened their own lending standards. With nowhere else to go, families in need reached out to those close to them to get by.

That help was often not enough for families to stave off disaster. The overwhelming majority of families that got help from family and friends to cover their regular expenses still had difficulty paying their bills. More than four-in-five households that borrowed from family and friends from August to November this year had difficulty paying expenses such as food, housing, medical care, among others. In comparison, only 24.5% of families that did not borrow from their relatives had difficulties with their expenses. Borrowing money from family and friends is likely a move made out of desperation and for many families it is not enough.

For many people, borrowing money may not even be enough to ensure that they can stay in their homes during the raging pandemic. About one-third of renters who borrowed money from friends and family were not current on their rent from August to November 2020. Almost all of these renters, 87.3%, expected to be evicted in the next two months. Similarly, a third of homeowners who had gotten money from friends and family were behind on their mortgage payments. Three-quarters, 75.6%, of these homeowners also expected to be foreclosed on in the following two months. The financial assistance from family and friends is an important lifeline in desperate times, but families still fall short.

The opposite then also holds. Families that borrowed from relatives and friends will struggle to repay that debt. Their own financial pain will translate into less financial security for people in their networks. Data from the Federal Reserve provide some insights on who in the past has financially supported family members and friends. That is, calculations based on these data show where the money came from. In 2019, 14.5% households financially supported family and friends in 2019 with an average amount of $9,337 that year. This totaled about $173 billion in payments between family and friends that year, when unemployment was low and incomes were rising. Even a small share of such support during the pandemic could end up totaling tens of billions, most of which families will have a hard time repaying in the near future.

When families cannot repay what they borrowed to make ends meet, their financial pain will also put a damper on the financial security of their friends and family, who helped them out in desperate times. Often those families are in shaky financial situations themselves. Data from the Federal Reserve show that a quarter of families that financially supported others in 2019 had less than $37,670 in income that year. Yet they gave relatives and friends an average amount of more than $3,000. Many of those that helped out others during the pandemic could find themselves in a tough spot too. The misery associated with the pandemic and recession will multiply among families that could least afford the added financial insecurity.