Student Loan Debt and the Racial Wealth Gap

The racial wealth gap in the United States is well documented and staggering — the net worth of a typical white family ($171,000) was almost 10 times more than a Black family in 2016 ($17,150), according to The Brookings Institution. This gap negatively impacts numerous factors in everyday life, including one’s ability to buy a home or vehicle, find a job, establish credit, and obtain student loans.

Student loan debt is a problem throughout the U.S., but when combined with the racial wealth gap, the debt becomes even more burdensome for Black borrowers.

Student Loans & The Racial Wealth Gap

The impact and cycle of the racial wealth gap

The impact the racial wealth gap has is complex, but here’s an initial, quick breakdown of the negative cycle it creates:

  • Black families’ median household income is less than their white counterparts ($70,642 to $41,361), according to data from the U.S. Census Bureau.
  • The difference in income means there’s less money available to put toward a child’s higher education. Black students’ parents contributed $4,200 for college on average, whereas white students’ parents contributed $12,000 on average, according to the Federal Reserve Bank of St. Louis.
  • With fewer funds to spend on college, Black families are forced to borrow more to pay for college. Black adults are almost twice as likely to have student debt than white adults.
  • Black college graduates earn less than white graduates. The Economic Policy Institute identified a 22.5% wage gap between Black and white college graduates in 2019. 
  • Earning less money out of school makes it more difficult to pay off student loans faster. As white college graduates use their higher salary to pay off their student debt faster and begin building wealth, Black graduates are still repaying their loans.
  • The inability to build wealth due to student loan debt will likely force the borrower’s next generation to take out student loans, and the cycle continues.

A closer look: the racial wealth gap and student loans

The financial cycle outlined above shows how disparity can result in student loans — a burden that 65% of college graduates deal with — negatively impacting one group of people so much more than another.

Here’s further examination of how and why the racial wealth gap makes student loans a riskier financial proposition for Black borrowers than white borrowers.

Higher student loan balances often lead to defaults 

The combination of high student loan debt and a lower salary puts Black student loan borrowers in a tough financial position as soon as they leave school and start their careers. In terms of default, a 2019 study on the student debt crisis revealed that almost 49% of Black borrowers who entered college as an undergraduate in 2003 defaulted on their loan by 2016.

Up to 70% of this group is projected to default by 2024. 

Black students who graduate with a bachelor’s degree default five times more than the rate of white graduates with the same level of education. Additionally, Black college graduates are more likely to default on their student loan than white college dropouts.

High student loan debt impacts Black borrowers’ other financial pursuits

The impact of student loan debt extends further than the repayment bill that’s due every month, especially for Black students. Hefty student loan balances can lead to higher interest rates on other credit-based, consumer lending products, like car or home loans.

Meanwhile, if the borrower falls behind on their federal student loan payments, the government can recoup the money by taking away tax refunds, garnishing wages and even withholding Social Security payments in the future.

Falling behind on private student loans can be even more harmful to a borrower’s financial future. Private student loans don’t offer as much protection as federal loans and usually have higher interest rates.

Defaulting on private student loans can lower credit ratings, which again makes it harder to borrow money elsewhere. Every extra dollar Black borrowers spend on high interest rates is one less dollar that could go toward building wealth and closing the racial wealth gap for future generations.

Predatory for-profit schools target BIPOC, leading to more student debt

For-profit financial institutions have played an increasingly bigger role in the racial wealth gap as it pertains to student loans. These schools’ culpability is, in part, due to race-based targeting and marketing.

For-profit schools recognize minorities are often the most vulnerable in terms of securing financial aid and that Black borrowers are more likely to take out riskier loans. These schools also sell the notion that they’re better at helping students navigate the complex student loan process — a weak spot of nonprofit educational institutions.

Unfortunately, Black borrowers enroll in a for-profit school and accumulate a significant amount of student loan debt — oftentimes without a degree to show for it. Sixty-five percent of Black borrowers drop out of a four-year, for-profit school, compared to 20% of borrowers who drop out of a four-year, nonprofit college, according to think tank The Century Foundation.

The racial wealth gap is at play here, again. Less wealth in Black households leads to borrowing, which leads to turning to for-profit schools — which are ready and willing to loan money — for financial aid.

Black students often need additional education to close the racial earning gap, leading to more student loan debt

According to a 2016 Consumer Finances Survey, the median net worth for white students with a high school diploma or less was $94,000. Meanwhile, a Black student with a bachelor’s degree or higher had a median net worth of $68,200.

This difference in net worth, along with differences in earnings and job opportunities, leads more Black college graduates to enroll in higher education. And with more education, comes more student loan debt, in most cases.

Black graduates carry about $7,400 more in student loan debt than white grads when they leave school. In just four years after graduation, that figure increases to $25,000. Two reasons for the jump are differences in repayment plans and Black college graduates needing to borrow more to attend graduate school.

The debt gap isn’t likely to close any time soon as more Black students are pursuing higher education. In 1993, the number of white and Black college graduates who went on to graduate school was nearly even at 38% and 35%, respectively.

In 2008, 47% of Black students who received a BA enrolled in graduate school within four years — only 38% of white students with a BA did the same. Meanwhile, the percentage of Black grad school students with more than $100,000 in student loan debt increased from about 2% to 30% between 2000 and 2016.

The racial wealth gap will only get wider, not narrower, as Black graduates continue to turn to graduate school — and, in turn, borrowing more money — just to be afforded the same job and earning opportunities as their white counterparts.

Multigenerational debt: Black parents invest in their child’s education through Parent PLUS loans

Black parents are often eager to help pay for their child’s college education, even if they have less wealth compared to white parents to do so.

At times, this eagerness leads them to take out Parent PLUS loans — federal loans that help parents pay for their child’s education. It’s a thoughtful gesture but also a risky one.

Parent PLUS loans can’t be transferred to the child and aren’t eligible for most income-driven repayment plans. The maximum amount that can be borrowed with a Parent PLUS loan is the school’s cost of attendance. That means a parent could take out a loan for their child’s entire college education, if needed, which could be a steep figure depending on where the student goes to school.

Parent PLUS loans were initially designed to assist middle- to upper-income borrowers. According to a report from the New America Foundation, however, the largest portion of Black borrowers taking out PLUS loans have an adjusted gross income of less than $30,000 a year.

Black families also use private student loans to help pay for their child’s college education. This option is risky, too, as private student loan interest rates can vary, are often higher than federal loans and don’t have many hardship protections.

Student loan policy reform to address the racial wealth gap and benefit Black student loan borrowers

From a societal standpoint, it will take several concrete steps to close the racial wealth gap and in turn make student loan debt more manageable for Black borrowers. More equitable wages would be a good place to start so that Black borrowers can begin paying off their debt sooner. In doing so, Black borrowers could build wealth faster so that future generations wouldn’t have to borrow as much to go to college.

The other part of the equation is what the government plans to do to address this issue. Former U.S. Vice President, and presumptive 2020 Democratic presidential nominee, Joe Biden, has proposed one option: Biden’s student loan plan would eliminate tuition at two- and four-year public colleges for borrowers who earn less than $125,000.

Private schools wouldn’t be eligible — except for historically Black colleges and universities (HBCU) and minority-serving institutions. Given that Black families’ median household income is $41,361, this part of Biden’s plan could go a long way toward closing the racial wealth gap as far as student loan debt is concerned.

For students who already have student loan debt, there’s a section in Biden’s plan that would cancel $10,000 for “economically distressed borrowers.” Borrowers in default, delinquency or who have income-driven repayments of $0 per month would be eligible. This provision could reduce by at least a year or two the number of payments from a borrower’s student debt balance, which could impact the significant number of Black borrowers who have or are expected to default on their loans, as mentioned earlier.

Of course, any student loan plan — whether proposed by presidential candidate Biden, President Trump or anyone else — only matters if it is passed by Congress.

In the meantime, it’s up to educational institutions, lenders and employers to play their part to help close the racial wealth gap and make student loan debt less of a burden on Black borrowers.

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