Risk of Recession and Debts of Millennial College Students

Emma H Neuhauser, PhD, Department of Business, Elizabethtown College, PA 17022

The latest Great Recession ended only about a decade ago, yet many investors seek to discover when the next economic down turn will come. In modern history, recessions or depressions have occurred every 7 to 9 years, yet the US has continued expansionary growth. Many policy makers have announced that they believe the growth will only continue in coming year. However, at the same time most polling of economists has shown that they believe some kind of recession will occur by 2021 or 2020 (Tanzi, 2019).  This research is focused on to what extend the next recession would be associated with debts taken by graduated college students. Student loan debt has about 44 million borrowers, with the total debt owed being about $1.5 trillion (Lockert, 2019). What separates student loans for college academics from other types of credit facilities is that it is extremely difficult to default on student loans, especially for the most part, they are held by the US government.

One of the consumer loans that is relatively large in the US is the auto-loan, which amounts to approximately $1.1 trillion in 2019, when including borrowers from all ages. What has become more commonplace in today’s society is to graduate college and then immediately finance a car purchase. Home ownership under 35 has declined in the past decade, and even with a recent increase this past year according to the census bureau, more people in their 20’s have been financing cars. This paper seeks to test the coincidence of student loan debt with auto loan debt, and unveil whether these debts are high enough to cause a future massive spike in auto loan defaults. Many auto loans are being financed by abnormally high loan rates which college students may not be able to foresee the burden, which could be attributed to the fact that they have already compiled such massive student debt that they have a difficult time understanding the loan rate and how quickly it can compile. Specifically, this research looks further into the number of trucks and SUVs that millennial students have been purchased on credit over the last decade. Trucks and SUVs tend to be more expensive than smaller passenger vehicles, thus the rising trend in financed purchases of trucks and SUVs can be correlated with student debt, thus contribute to a potential increase in default on both auto and student loans similar to a study on new and used vehicle loan defaults (Argwal, 2008).

In addition, this research provide evidence on behavioral economics, college age students don’t always act rationally, especially in the modern age. With a lack of awareness of their situation and attempting to “fit in” with current trends, their actions can differ from the expected rational choices economics might expect.  As previously studies the housing crisis of 2008 indicate, higher student loans are associated with the likelihood that college graduates move in to their parents’ home and defer sizable life investments such as marriage or buying their first home (Gillen, 2008). This study seeks to explore, the number of students that don’t follow this economically sound decision making process, and instead sink themselves further into debt with unnecessary auto loans.

References:

Agarwal, Sumit and Ambrose, Brent W. and Chomsisengphet, Souphala. (2008, September).  Determinants of Automobile Loan Default and Prepayment.

Gillen, Andrew. (2008, April). A Tuition Bubble? Lessons from the Housing Bubble.

Lockert, Melanie. (2019, March). Student Loan Debt Statistics in 2019: A Look at The Numbers.

Tanzi, Alexandre. (2019, Febuary). Most Economists See U.S. Recession by 2021, Survey Shows.