Commentary
As a university professor, one of the greatest rewards is mentoring students to realize the American Dream by pursuing a life aimed at unlocking their full human potential. Doing so requires reflection upon what it means to be human and, from there, grasping why the key to happiness is so counterintuitive: We fill ourselves up by giving ourselves away.
Readers won’t be surprised to hear that helping young men and women make this connection has become increasingly difficult with each new generation.
We recently observed that while many young people are well aware of the burdens of student loans and mortgage debt, they have almost no awareness of the perils of automobile debt. Newly minted graduates beginning full-time careers are tempted to splurge their signing bonuses and graduation gifts on down payments for automobile loans that are far beyond their means to repay. To see the scope of the problem, consider the following facts.
The latest data from the Federal Reserve indicate that increasing automobile debt is an alarming trend. Auto debt grew by $28 billion in the most recently reported quarter—significantly higher than the $16 billion increase in retail cards and consumer loan balances and the $21 billion increase in student loans. As of the first quarter of 2023, Edmunds, an online resource for automotive inventory and information, noted that the average monthly payment on a new car was $730, up from $656 a year earlier.
A shocking 16.8 percent of Americans pay more than $1,000 per month on their new-vehicle loans—an all-time high. Auto debt makes up 10 percent of all debt held by Americans aged 30-plus and, more significantly, almost 20 percent of all debt of those aged 18–29. Young Americans are facing a serious auto-loan crisis.
Several proximate causes are in play. First, many Americans think of cars as status symbols and overspend on them as a result. Second, rates for used cars are 8.21 percent, considerably higher than the current 6 to 7 percent for mortgages and 5 percent for student loans. Third, although new-car auto rates are just 3.86 percent, many young buyers don’t factor in the rapid depreciation of new cars. Syndicated radio personality Dave Ramsey estimates that a new car depreciates by 9 to 11 percent the moment it’s driven off the lot. According to Consumer Reports, for individuals with low credit scores (read “youth”), the rate situation is much worse: The annual rate for subprime auto loans can exceed 25 percent.
Finally, rule-of-thumb guidance states that auto loans and car insurance should account for no more than 10 percent of take-home income. Yet, 25 percent of all loans in the United States exceed this threshold—and that number skyrockets to 50 percent for subprime borrowers.
As business school professors, our go-to solution to this problem is to equip our students with the analytical tools to assess how to meet their actual transportation needs most efficiently. We point out pearls of financial wisdom, such as the classic bestseller “Millionaire Next Door,” which notes a characteristic of millionaires: “We live well below our means. We wear inexpensive suits and drive American-made cars. Only a minority [23.5 percent] of us drive the current-model year automobile. Only a minority ever lease our motor vehicles.”
We emphasize the distinction between borrowing to support investment—in an appreciating asset (mortgage) or human capital (student loan)—versus borrowing for consumption (auto loans).
Yet we worry that the auto-debt crisis is a symptom of a much deeper crisis—something that a sincere conversation on the merits of financial responsibility can’t fix. On average, young Americans are exposed to 1.5–3.7 million advertisements per year. Regardless of the product or ad medium, the basic appeal is always the same, “Buying this will make you happy.” This relentless appeal to the pursuit of base materialism as the ultimate end is as effective as it is false. Its toxic consequences are greatly magnified at a moment in history when the lessons on what it means to be human and, hence, how to achieve authentic happiness—hard-won over millennia by every major faith and wisdom tradition—are being gleefully swept aside.
It isn’t enough to provide the tools or even to argue that financial responsibility is the key to getting rich. Rather, we must bring our students to see that the pursuit of virtue is, by definition, the pursuit of a flourishing life. Temperance is a virtue. Acquiring it is a major step toward unlocking one’s full human potential. This is the deeper conversation that’s required of us as true educators. We must have the courage and perseverance to rise to the task.
