Student Debt and the Racial Wealth Gap: Partial Forgiveness Alone Won’t Solve This Crisis

This story is part So moneyan online community dedicated to financial empowerment and advice, led by CNET Editor at Large and So Money podcast host Farnoosh Torabi.

Right now, the Biden administration’s student loan relief plan is on break. Unfortunately, it has been blocked by a federal appeals court as it considers claims from six Republican-run states that the plan is not legal and would starve state-based loan companies of revenue.

This is just one of many setbacks and objections the student debt relief program has faced in recent weeks. In another lawsuit, which was dismissed, a conservative Wisconsin legal group sued the White House for saying the plan could narrow the racial wealth gap and improve racial equity, alleging the government had a ” inappropriate racial motive”.

Oh good?

And all that political blowback on partial relief for some borrowers. Imagine the uproar if all student debt was eliminated or higher education became free.

But this column is not about how I want naysayers to buzz. Instead, it’s about how, after this temporary order is settled, we need to focus on fixing our broken American higher education system, starting with focusing on the most vulnerable borrowers. and the most financially penalized: Black Americans.

The country’s $1.7 trillion student debt crisis places a disproportionate burden on black borrowers because of the racial wealth chasm. On average, black households have about eight times less wealth than white households, and black students borrow $25,000 more for higher education.

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Due to greater financial need, blacks are taking out more loans in hopes that it will pay off when they get jobs after graduation. But the effect is cyclical – higher loans mean they pay more compound interest over time, and because they earn less on the dollar than their white counterparts, they find it harder to repay loans than they do. other groups (this is especially true for individuals). loans, which may have higher interest rates than federal loans and minimal consumer protections). A 2019 study from Brandeis University found that 20 years after first enrolling in school, the average black borrower still owed 95% of their original student debt. And according to the Brookings Institution, three times as many black borrowers default on their loans than white borrowers.

Going forward, we should focus reform on racial inequality. By doing so, we have a better chance of helping not only this core group of struggling borrowers, but anyone who has been sold a bogus bill – by school counselors, lenders, college administrators, and most importantly, our elected leaders — — on the reality of an expensive college degree.

A system where people are not saddled with student debt would benefit everyone. “These days, a higher education is as basic as a primary or secondary education,” Brookings Metro’s Andre Perry said in an August interview with The Current. “Society needs its people to be better educated. And so we need a system that treats them as well.”

Why and how student debt reform should go further

The administration’s loan cancellation plan is a move in the right direction. It pledges to forgive up to $10,000 in federal student loan debt for borrowers earning less than $125,000 a year (or $250,000 for married couples), or up to $20,000 for recipients low-income Pell grants.

But as my recent So Money guest, Peter Dunn, a certified financial planner, said, “It’s basically a short-term fix. It does not solve the larger underlying problems of the American higher education system.

More importantly, political and financial experts say the move isn’t enough to really help close the racial wealth gap. In a conversation on my podcast with Jean Lee, president of the Minority Corporate Counsel Association, we discussed the impact of student debt on black and marginalized groups. “The federal government disproportionately benefits black students because they tend to take out larger loans than any other group,” Lee said. “There is an opportunity for the government to certainly make a bigger difference.”

Read more: Student Loan Debt Is Crushing Millennials’ Financial Dreams

Carl Romer, a former research assistant at Brookings who co-authored the Student Debt Cancellation Should Consider Wealth Not Income study with Perry, told me in an email that, based on their findings, “More student debt is forgiven, the greater the ameliorative effect will have on the racial wealth gap.”

More debt cancellation would be better for the current generation of borrowers, but where do we go from there? How do you ensure that the next rising student doesn’t borrow more than he can afford for a degree that won’t necessarily lead him to a well-paying job? How do we prevent the next generation from being crushed by the burden of lifelong debt from skyrocketing tuition fees?

If our goal is to create a level playing field, here are some ways policymakers can close the racial wealth gap and address what has become a major social and economic crisis in this country.

Eliminate interest

The first step Lee suggests is for the administration to waive all interest for black borrowers. “Compound interest really adds up,” she said. A study by JPMorgan Chase found that 13% of black borrowers may never repay their loans because the extra interest prevents them from repaying the principal. Combine that with an overall increase in the cost of living and the fact that black students face wage discrimination, making upward mobility even more inaccessible.

Soaring interest rates have a lasting negative impact on wealth inequality. I found an analysis showing how a borrower with a federal loan balance of $28,000 and 5.8% interest pays $80 more per month, which means that if the interest were eliminated, he could save about $9,000 over a decade. Imagine if someone could invest that money in a retirement fund, or if it could instead be earmarked for a down payment on a house.

Consider Wealth, Not Income

To qualify for the current debt relief plan, borrowers must earn below a certain income threshold. But how much a person earns — without any context of their financial obligations, generational wealth, or total amount of debt — is an arbitrary measure.

Lee made an effective argument on my podcast that student debt relief shouldn’t be based on income levels. For example, if someone is earning above the $125,000 income cap, that doesn’t mean they can afford to pay off their debt, especially since inflation continues to make it harder to earn. purchase of basic necessities. Moreover, the reality after graduation is different for marginalized households. She noted that Asian Americans, Black Americans, Latinos and Indigenous groups often have more than one generation within a household, supporting not only their own family but also their aging parents. “What if you have three generations living in one house and you are the sole breadwinner or everyone is relying on you?” Lee applied.

Student debt forgiveness reform should consider wealth rather than income, Perry and Romer say. “Policies should be evaluated based on their expected impact on people of different wealth strata,” Romer told me. “Because black families have lower wealth than non-black families, they are less able to contribute to the costs of higher education. This contributes to black students dropping out of college for cost reasons, and leaves black households more likely to have student loans with no corresponding increase in income,” Romer said.

For context, more than half of black households with student debt have zero or negative net worth. The main problem is that black people are in an overall more precarious economic situation, with less intergenerational wealth due to the history of discrimination. This means that debt-ridden black students are less likely to exceed the net worth of their parents’ generation.

Expand Public College Access and Funding

While higher education is always correlated with higher lifetime earnings, this equation is not so straightforward for black borrowers. The idea that a degree will “pay off” is more debatable if you still face discriminatory barriers in housing, employment, and other areas once you graduate.

Private establishments are on average about 282% more expensive than public establishments. But many community colleges are subsidized, making them inexpensive alternatives, with an associate’s degree often serving as a stepping stone to pursuing a bachelor’s degree elsewhere. Perry argued on The Current that subsidies already in place in the public sector should be extended so that the cost of attending four-year public universities is free.

Ultimately, tuition reform should make public higher education degrees more financially accessible, eliminating the need for black students — and all students — to take out loans in the first place. And this would mean that young people, especially from the most disadvantaged groups, would no longer be penalized for wanting to advance their studies.