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Racial Disparity in Student Debt

Hellie Howard | November 13, 2019 Employer Insights

Racial Disparity in Student Debt

The student loan debt crisis is affecting everyone, but studies over the last decade have shown that communities of color must cope with significantly more risk when financing college. For example,  81% of black students borrow to attend public schools while only 63% of their white peers take out the same aid. Meanwhile, 39% of black borrowers drop out of college. At for-profit schools, that number is even higher.

The student loan debt crisis is affecting everyone, but studies over the last decade have shown that communities of color must cope with significantly more risk when financing college. For example,  81% of black students borrow to attend public schools while only 63% of their white peers take out the same aid. Meanwhile, 39% of black borrowers drop out of college. At for-profit schools, that number is even higher.

It’s not just black students who are suffering. Latino and Native American borrowers are struggling with similar scenarios. 

The current racial disparity in the student loan crisis results in a wider wealth gap, which in turn has effects on the overall economy. Here’s why:

 

Why do minority students borrow more?

While there has always been a wealth gap, it hasn’t always been this wide. A decade ago, 38% of black associate’s degree recipients took out loans and 32% of white students borrowed for the same degree. Since then, that six-point gap has more than doubled. 

The disparity in borrowing that we see today is part and parcel of the overall racial wealth inequality. 

Historical Inequality

The African-American community suffered years of unpaid labor under slavery without reparations. This was then followed by Jim Crow-era laws, targeted sabotage of successful black communities, and a lack of accessibility to resources. All of these factors have contributed to the current state of affairs for black students. In the 99 years between the end of slavery in 1865 and the Civil Rights Act of 1964, black people were limited in every aspect – from where you could live to what your job could be. Benefits like Social Security and military assistance were often denied to black workers. We can see the legacy of the historical policies today:

  • White Americans make $1 million more than African-Americans over the course of their lifetime. 
  • Black men earn 74 percent as much as white men and black women make 64 percent as much as white men. 
  • Inequality, a research project from the Institute for Policy Studies, reports that black and Latino families are twice as likely than white families to have zero wealth. African-American families are more likely to be in debt. 
  • In a Pew Social Trends study, almost one-third of black families reported they had negative wealth. 

The African-American community isn’t alone. Similar discriminatory policies against other ethnic minorities have decimated the generational wealth of these communities as well.

As their parents and grandparents have not had the same access as whites to create wealth, it’s not surprising that racial minorities today are more likely to borrow for college, and borrow more often. They are also more likely to drop out of college or default as a result of their loans. The overall wealth gap not only affects the ability of borrowers to pay back their loans, but this same thread of income inequality has contributed to the inability of families of color to save for higher education in the first place. 

Lack of Adequate Financial Aid

This same wealth gap appears in the student loan crisis through high tuition cost and lack of adequate financial aid.

“Based on my research, the vast wealth inequality has made it difficult for families and students to afford the high cost of college,” says Fenaba Addo, Ph.D., an assistant professor at the School of Human Ecology’s Department of Consumer Science at UW-Madison. “The Pell Grant hasn’t kept up with the rising costs of college. Families of color have had to acquire debt to make up that difference.”

Generational inequality created a lack of assets, but it was the rising cost of tuition that sustained the gap. In the past 20 years, in-state tuition and fees alone have ballooned by 221%. The increase in prices has pushed families of color to rely on debt as a primary mean of financing. 

Over half of ethnic minority students take out private loans without exhausting their federal loan opportunities. For students of color this means reliance on high-interest, unsubsidized loans. McKinsey and Company has reported that 30% of black families alone are underserved by their banks and 17 percent are not even connected to a mainstream banking system. 

Despite the lack of resources, the number of ethnic minority students entering higher education has continued to rise. College is still seen as a critical career move. The question is how to better support communities of color in higher education.

 

Reducing risks for students of color

The disparity in borrowing and defaulting for minority students comes down to risk. 

“We’re not saying college isn’t worth it. But there are additional risks for borrowers of color,” says Fenaba. “When looking to solve the debt crisis, we need to think about if it will also reduce inequality and that risk.”

Today there are many possible solutions to the debt crisis which would also positively affect borrowers of color. Free or capped tuition in public schools could prevent over-borrowing. Loan forgiveness for current students could also remove the burden for millions of workers, although there is much disagreement about how much debt should be forgiven. 

More conservative approaches prefer reform of the current repayment plans. The Aspen Institute reports that one of the most affordable repayment plans, income-based repayment (IDR), is severely limited and could be expanded. Only 24% of federal borrowers are enrolled in this plan because of the restrictions, and if a borrower defaults, they lose access to this plan as well. Reducing the eligibility criteria for this repayment option may help ease the burden for millions of borrowers. 

Employers can also take part through offering higher wages or loan repayment benefits to their employees. This approach not only supports your financially employees, but also boost employee retention and workplace satisfaction. In one study by FC Consulting, 85% of millennials would accept a job offer. Another report states that 86% would stay with an employer for five years if they received contributions towards their loan. Additionally, those millennials who preferred student loan repayment to other benefits were more likely to be women and people of color.

 

The sooner, the better

Experts suggest that closing the wealth gap can boost the economy by 4-6% by 2028. Reducing the student loan debt burden for families of color is a step towards this goal. 

A combination of public and private policy can create a healthier community more inclusive to everyone.

Want to know how you can join the fight against student loans and improve the lives of your employees? Contact us today.