With household debt on the rise, middle-class Americans are focusing on paying down mortgage, credit card and student loan debt — often at the expense of saving for retirement or creating an emergency fund.
Among middle-class Americans, more than half (55%) prioritize paying off debt above all other financial concerns, according to a Transamerica Institute survey of over 5,600 people with an annual household income between $50,000 and $199,999.
Other financial goals — including saving for retirement, building an emergency fund and setting money aside for a major expense — also rank high among survey respondents. But none carry the same weight as paying off debt.
Exactly what that debt looks like can vary significantly across age groups.
Those in their 20s and 30s are far more concerned with paying down student loans, while those in their 40s and 50s are focused on mortgage balances. Across all age groups, however, credit card debt remains a core focus.
For many, paying down debt of any kind seems like an absolute good. But financial advisors say that an excessive focus on reducing debt can lead to other financial problems down the line.
Weighing options when paying off debt
When working with a client to pay down debt, advisors say the math is relatively simple: prioritize paying off high-interest loans, but don’t pay down “productive” debt at the expense of other financial concerns like saving for retirement.
“When I talk with clients about debt, I always remind them that not all debt is created equal,” said Marshall Burroughs, a financial advisor at RMR Wealth Builders in Montclair, New Jersey. “Just like there’s good and bad cholesterol, there’s ‘toxic’ debt and ‘productive’ debt. Toxic debt (think 30%-plus credit card balances) drains cash flow and creates stress. Productive debt (think a low-rate mortgage) can actually help build wealth over time. When we build a payoff plan, we target the toxic debt first because that’s what quietly eats away at financial flexibility and can throw long-term goals off course.”
Some advisors use the historical returns of benchmarks like the S&P 500 to help determine which debts are worth paying down aggressively and which are better left alone. If the APR on a given debt is greater than the average expected return one could expect from the stock market, they’re usually better off paying down the debt, advisors say.
For the purely rational, that might be the end of the conversation. But debt, as with many finances, can also be a deeply emotional issue. Taking into account the emotional weight that a significant debt can have on a client complicates the equation.
“Clients who have focused on debt reduction seem to be the happiest, even when compared to those having a larger total net worth but a higher proportion of debt,” said Sammy Grant, a senior wealth advisor at HB Wealth in Sandy Springs, Georgia. “Many advisors and Americans focus on this as a simple math question — is the expected return of the alternative use of funds higher than the after-tax cost of the debt — but the math equation is easy to solve. Judging how someone feels about the freedom coming with lower debt burdens is impossible to quantify, but almost always greater than expected.”
Grant is far from alone in his approach. Kevin Feig, founder of Walk You To Wealth in Dover, Massachusetts, said that some of his clients have chosen to pay off low-interest debt — like mortgages — ahead of time just so they didn’t have to think about the monthly payment anymore.
“During conversations like these, the decision isn’t financial or math-based, but rather about the psychological and emotional impact of debt elimination,” Feig said.
Getting comfortable with an indebted future
Despite the middle class’s focus on paying off debt, many advisors expect the problem to only grow over the coming years.
Melissa Caro, founder of My Retirement Network, a digital media platform to promote financial literacy, said she’s seeing a growing number of people struggling with car loans and medical debt than in past years.
“What’s changing is that people are no longer seeing debt as a temporary setback — it’s become a constant part of the financial landscape,” Caro said. “That’s dangerous, because when every dollar is already spoken for, flexibility disappears. You can’t build security if all your energy goes to digging out. Sometimes that means slowing down debt payoff just enough to rebuild cash reserves or restart retirement contributions.”
That situation is unlikely to improve without macroeconomic changes, according to Lucas Wennersten, founder of 49th Parallel Wealth Management in Scottsdale, Arizona.
“Debt is becoming a bigger issue because rates are higher, debt is being used more, the job market is weak and we may be losing jobs right now to AI,” Wennersten said. “Everything is getting more expensive. The middle class is shrinking, the wealth gap is growing, and it is expected that middle management roles will continue to be eliminated.”
