Our Director of Automotive Industry and Economic Analysis, George Augustaitis, provides insight into how forgiveness of student loans could impact vehicle sales in the US.
Debt continues to increase while wages lag, and many Americans struggle to purchase a new car. In fact, affordability represents the most severe headwind causing the decline in vehicle sales, which are down 2.0% calendar year to date (CYTD) 2019.
A recent survey from Bankrate finds that 58% of Millennials and 56% of all Americans lose sleep over money troubles. Today, 40% of Millennials earn at least half their income from a side hustle. Millennials are the largest living adult generation as of 2019, and they represent a key demographic in the success of the new and certified pre-owned (CPO) vehicle market. However, an increasing number of Millennials indicate that cost pushes them away from purchasing a new vehicle. Knowing this, increasing Millennial disposable income would lead to a rise in the new-vehicle market.
For Millennials, student loans represent the primary reason for their low disposable income. An estimated 44.7 million people in the US have student debt, which amounts to 1 in 4 Americans. With the estimated student debt at $1.49 trillion and the average monthly payment at $393, the increasing amount of student debt shapes affordability significantly more than wages, housing costs, and the rising price of vehicles.
During the Democratic debates for the 2020 election, many candidates emphasized their policies on student loans. The most recent proposal came from Senator Bernie Sanders, who introduced a bill to cancel all of the roughly $1.5 trillion of student debt. According to Senator Sanders’ fact sheet, the bill would save the average student loan borrower $3,000 a year in student loans, which would provide an economic boost of nearly $1 trillion over ten years.
Putting aside the other potential implications of student debt forgiveness, consider what this kind of stimulus could mean for the auto industry. Student debt remains one of the largest economic struggles for Millennials and other generations. Therefore, loan forgiveness could result in one of the greatest economic stimulus packages in the history of the US. A stimulus program of this magnitude would create an economic windfall that would boost many sectors in the economy, including both automotive and housing.
The impact on automotive
The average MSRP of all vehicles continues to rise more quickly than wages. This heightens the struggles of affordability in the automotive industry. Over the past six years, the average MSRP of vehicles increased nearly $7,000, the average lease payment approached $500 per month, and the average finance payment fell above $550 per month. Student loan forgiveness would result in more than 44 million people receiving an additional $393 per month. This would decrease the affordability headwind and create a spark in new-vehicle and CPO sales.
In the short term, the impact would come from consumers entering the market either at the end of their lease or because they are in need of a new vehicle. With an additional $393 per month in their budget, consumers entering or reentering the market would have more vehicles to choose from with this added discretionary income.
Longer term, the market would see a potential increase in new entrants. Currently, there are consumers who stay out of the CPO and new-vehicle markets due to affordability. With student loan forgiveness, those 44 million consumers would be able to pay down debt and save for a down payment and possibly could enter the new-vehicle or CPO market for the first time.
Increases in housing help the automotive industry
If the result of student debt forgiveness increased home purchases, that would also help drive automotive sales. New-home construction and home remodeling have historically positively correlated to automotive sales, specifically in the truck market. As contractors take on more remodeling work and bid on construction projects, they could hire more workers and build their business, which would positively impact the truck market.
Student loan forgiveness has the potential to spur sales
Student loan forgiveness would give consumers additional monthly income to purchase a vehicle, leaving the most immediate impact in the new vehicle and CPO market. An additional $393 per month would put many consumers into a new class of vehicle, potentially moving them from non-luxury to luxury. Even if consumers spent only a portion of that $393 on a vehicle, an additional $100 would allow consumers to combat the rising cost of new vehicles.
In the midterm, an increase in home ownership would trickle down to the vehicle market. The impact would not immediately affect new-vehicle sales in the first six months, but strengthening the home-construction industry would provide sustained growth in the automotive market over time, providing long-term stability. The result could be the greatest stimulus package in the history of the US, and it would likely cause a new sales peak in the US automotive industry.
What can US dealers do to prepare?
If student loan forgiveness does happen, dealers can expect an influx of Millennial shoppers on their lots. These shoppers have unique preferences and shopping habits, and dealers need to know how to interact with them in order to win their business. Here are some tips for selling to Millennials, based on recent CarGurus research:
- Optimize your digital presence. While you should do this whether student loan forgiveness happens or not, Millennials are always connected and do the bulk of their research online. Optimizing your online presence could mean improving your own website, diversifying your presence across third-party sites, increasing your advertising on social media, or making your site mobile-friendly.
- Present options and propose alternatives. Millennials are more flexible at the start of their car-buying journey. Start a discussion at the beginning of the process and present options early on so they have a chance to consult family and friends as they narrow their options.
- Don’t push too hard. Millennials are excited about the prospect of buying a car—and will be especially excited if their student debt has just been forgiven—and they generally enjoy the shopping process. Avoid giving them the third degree when they first make contact. Instead, find out what they’re looking for and then start preparing for their in-person visit.
For dealers, it’s more important than ever to start identifying new ways to attract Millennials. With the right strategy in place, you’ll be more likely to capture shopper interest and stand out from the competition if student loan forgiveness becomes a reality.