It would seem logical, on the surface; newly minted college graduates, carrying an enormous amount of loan debt, just aren’t able, or willing, to take on the cost of a new car. But as we all know, economics can defy logic, and it turns out if you look at the data, graduates are buying cars after all, and they’re a better risk than others in their age group.
Graduates On The Road
This comes from credit bureau TransUnion, which studied three million consumers across three different time periods, 2005, 2009, and 2012. What they found went hard against the conventional wisdom.
And, at first, that wisdom holds. College graduates spend the first six months to a year out of school lagging behind others in their peer group in terms of buying cars, with 34% of those studied having both a car loan and a student loan compared to 42% for those without a degree.
The difference, however, doesn’t hold with time. In fact, two years later, the college graduates had closed the gap. Just as important, however, was that the loans were better all around. There were fewer delinquencies, fewer bad loans, and fewer complications. Overall, the data found that far from borrowing less, those with student loans borrowed the same and were a better risk. But why does the data run so contrary to the overall wisdom?
There are a number of reasons this could be the case, most of which make it clear just what a good risk college graduates are, credit-wise. College graduates have, by far, the lowest rate of unemployment in the nation; when sorted by education, college graduates have been, at minimum, employed at a rate of 90% for men and 95% for women. In other words, graduates are more likely to have a job and are thus more likely to be able to make their car payments.
Furthermore, college graduates are as a rule being paid better at those jobs. Even those with English majors, often the butt of unemployment jokes, were drawing an average salary $3,000 more than the national average for high school graduates with no further education. While that may not exactly be raking in what those business majors supposedly do, it’s still more in the bank and thus more for a car.
But what about those student loans? It’s worth noting that while the amount of student loan debt is worryingly large overall, the actual percentage of student loan debt held by many people is more than manageable; the median debt was just $13,000, which many are paying off over the course of ten years. The gains in salary more than outpaced the actual debt.
In addition, that student loan history may have helped graduates get cars. Unlike those without student loans, the debt helped college graduates generate a credit history that allowed them a higher credit score and thus access to better auto loans.
This isn’t the first time the conventional wisdom of lending has been shown to be flawed. The ultimate lesson is that a good customer is a good customer, and any auto loan should be thought about in the long term.