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Student loan debt adds to racial wealth disparities, research finds

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A graduating student wears a money lei, a necklace made of U.S. dollar bills, at the Pasadena City College graduation ceremony, June 14, 2019, in Pasadena, California.

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While the pandemic has forced some to take a break from college to reduce expenses or save money, the burden of growing student debt was an issue long before COVID. And research suggests there is a growing racial inequality problem with student debt.

Fenaba Addo is a professor of consumer science at the University of Wisconsin–Madison and has researched this student debt gap. The following is an edited transcript of her interview with “Marketplace Morning Report” host David Brancaccio.

David Brancaccio: What have you found in terms of student debt when you look at it in the context of the race of the people holding the debt?

Fenaba Addo: Our research has found that Black borrowers tend to borrow the most, they tend to have higher loan balances and they have the highest rates of default and delinquency while in repayment.

Black borrowers take on more debt

Brancaccio: So there’s a couple things to unpack here. So first of all, Black borrowers take on more debt. That’s what your data shows. And then it takes longer to pay back? The debt lingers longer?

Addo: That’s correct. So, to attend postsecondary institutions, they are borrowing more, and [of] student loan borrowers who are in the repayment phase, Black borrowers tend to have longer repayment phases, and white student loan borrowers pay back their debt faster. So the disparity actually grows over time.

Brancaccio: But in the this general discussion of widening inequality in America, there’s some very concerning features here. I see that for white families, the wealthier the family is, the less student debt they take on, but that’s not necessarily the pattern for Black families.

Addo: That’s actually one of the striking findings of one of my earliest articles that was exploring the relationship between parental wealth and debt accumulation. White young adults who went to college and took on debt, as their parental wealth increases, they took on less debt, right? We did not find any evidence to support this same relationship among Black borrowers. Black borrowers who came from higher net wealth households, we did not see them taking on less debt to attend college.

Intergenerational wealth inequality

Brancaccio: Has there been a hypothesis for why that’s happening?

Addo: Yeah, so we have several ideas. And one is tied to racial wealth inequality overall. So in our data, at the higher ends of the wealth distribution, which was having approximately $200,000 — it was actually about $191,000 to be in that top wealth quintile — only about 3% of Black families actually had enough wealth to qualify to be that high up in the wealth distribution. We also kind of saw differences in the overall wealth portfolios, so having less access to fungible types of wealth, so savings, you know, home equity that they could draw upon, in order to transfer additional funds to their children.

Brancaccio: And here we are, we’re talking about parents and children, this is an intergenerational phenomenon that you’re talking about.

Addo: That’s absolutely the case. So, you know, in the accumulation piece, we see the relationship between parental wealth and their children’s debt accumulation. And then we look at the next piece, which is how do you pay off that debt? We find that these disparities may be contributing to ongoing racial disparities in young adulthood, which we know will continue on throughout an individual’s life, contributing to ongoing persistence of racial wealth inequality within our society.

Policy solutions: more grants, better loan repayment programs

Brancaccio: And so what are some of the ways you’d like policymakers to make use of findings like this, in trying to really ease these gaps that we’re seeing, these inequalities?

Addo: There are several pieces to this story. There’s the accumulation piece, and then there’s the repayment piece. How do we get Black households and Black families and their children, who want to attend postsecondary institutions, access to the resources, the economic resources, that they need in order to pay for college? And, how do we think about the types of support that they need in order to attend these colleges? So, thinking more about need-based aid. Moving away from loan-based aid, but more to grants, to help them pay for college so that they’re not accumulating excessive amounts of debt if they don’t have the resources to pay for college, in particular for people who are coming from low-income and low-wealth households.

And then we think about, in the repayment part, are there particular potential frictions in the labor market? We want to think about labor market discrimination, in particular. There’s very strong evidence to suggest that Black college graduates have higher rates of unemployment compared to white students without a college degree. So, that is all tied to the ability to earn a living and have income that allows you to pay back those debts in a reasonable time. But then also, how do we think about what are the current policies in place, such as income-based repayment programs that can be improved upon so that those who need those particular types of policies are accessing them and using them in a way to help them pay back their debts in a reasonable time period.

Brancaccio: Help me understand. Everything you’re talking about, it’s not just a proxy for income. You’ve found ways to control your data so that you can really see where the effects of race play out.

Addo: That’s correct. So we control for all types of economic resources that we can observe, trying to isolate the role that being Black, or being racialized as Black in our society, has on students and their families as they navigate postsecondary education. And in particular, looking at the associated risk with choosing to [attend college] and really wanting to focus in on the financial risk associated with that. There’s lots of evidence in support of the lifetime returns to getting a college degree. But we also need to expand what we think about when we think about the overall value and the decisions entailed with pursuing a college degree, and one of them is financial. And, as our data suggests, and as the work that we’ve been doing over the last few years really suggests, the costs for Black borrowers have been growing exponentially. And it’s concentrated in particular amongst the amount of loan-based aid that they are taking on to pursue this dream.

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