This story is part of So moneyan online community dedicated to financial empowerment and advice, led by CNET Editor at Large and So Money podcast host Farnoosh Torabi.
The Biden administration’s student loan relief plan is currently on pause. Unfortunately, it was blocked by a federal appeals court as it reviews claims by six Republican-run states that the plan violates the law and would deprive their state lending companies of revenue.
That’s just one of many setbacks and objections the student debt relief program has faced in recent weeks. In another lawsuit that was dismissed, a conservative Wisconsin legal group took action against the White House for claiming the plan could reduce the racial wealth gap and improve racial equality, alleging the government had an “inappropriate racial… Motive”.
For real?
And all these policy failures because of only partial relief for some borrowers. Imagine the uproar if all student debt were abolished or higher education made free.
But this column is not about how I want to silence naysayers. Instead, it’s about how, after this temporary order is resolved, how best to focus on fixing our broken U.S. higher education system by first focusing on the most financially vulnerable and penalized of all borrowers: black Americans.
The nation’s $1.7 trillion student debt crisis is disproportionately weighing on black borrowers due to the racial wealth divide. On average, black households have about eight times less wealth than white households, and black students borrow $25,000 more for college education.
Due to greater financial hardship, blacks take out a larger amount of credit in the hope that it will pay off if they get a job after graduation. But the effect is cyclical — higher borrowing means they pay more compound interest over time, and because they earn less from the dollar than their white peers, they find it harder to repay the loans than other groups (this is particularly true for Individual loans, which may have higher interest rates than federal loans and minimal consumer protection). A 2019 Brandeis University study found that the average black borrower still owed 95% of their original student debt 20 years after they first enrolled in school. And according to the Brookings Institution, three times as many black borrowers are in default on their loans as compared to white borrowers.
In the future, we should focus reform on racial injustices. This gives us a better chance of helping not just this core group of struggling borrowers, but everyone who has been sold a bogus bill of sale — by school counselors, lenders, college administrators, and most importantly, our elected leaders — about the reality of an expensive college degree .
A system where people are not burdened with student debt would benefit everyone. “College education is as fundamental today as elementary or secondary school,” senior fellow Andre Perry of Brookings Metro told The Current in an August interview. “Society needs higher education among its population. And so we need a system that treats them the same way.”
Why and how student debt reform should continue
The government’s loan forgiveness plan is a step in the right direction. It promises to forgive up to $10,000 in state student loan debt for borrowers who borrow less than $125,000 a year (or $250,000 for married couples) or up to $20,000 for recipients of low-income Pell Grants earn income.
But as my recent So Money guest, Peter Dunn, a certified financial planner, observed, “This is essentially a short-term fix.
Most importantly, political and financial experts say the move isn’t enough to really help narrow 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 blacks and marginalized groups. “The federal government really benefits disproportionately from black students because they tend to borrow larger amounts than any other group,” Lee said. “There is an opportunity for the government to certainly make a bigger difference.”
Continue reading: Student loan debt is destroying millennials’ financial dreams
Carl Romer, a former Brookings research associate who coauthored the study “Student Debt Cancellation Should Consider Wealth Not Income” with Perry, told me in an email that based on her findings, “As more student debt is canceled, the better effect it will have on the racial wealth gap.”
More debt relief would be better for the current generation of borrowers, but where do we go from here? How do we make sure the next aspiring college student doesn’t borrow more than he can afford for a degree that doesn’t necessarily get him a well-paying job? How do we avoid leaving the next generation weighed down by a lifetime of debt from skyrocketing college tuition?
If our goal is to level the playing field, here are some ways policymakers can narrow the racial wealth gap and address a major social and economic crisis in this country.
eliminate interest
The first step Lee proposes is for the administration to eliminate all interest on black borrowers. “The 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 additional interest prevents them from repaying the principal. Combine that with the overall rising cost of living and the fact that black students face wage discrimination, making upward mobility even more inaccessible.
Rising interest rates have a lasting negative impact on wealth inequality. I found an analysis that shows how a borrower with a $28,000 federal loan balance and 5.8% interest pays an additional $80 per month, which means if the interest is gone over the course of a decade, he’ll end up paying about $9,000 could save dollars. Imagine if someone could invest that money in a retirement fund, or it could be used towards a down payment on a home instead.
Think wealth, not income
To qualify for the current debt relief plan, borrowers must earn below a certain income threshold. But how much someone makes — without any context of their financial obligations, generational wealth, or how much aggregate debt they actually hold — is an arbitrary metric.
Lee made a powerful argument on my podcast that student debt relief shouldn’t be based on income levels. For example, if someone earns above the $125,000 income ceiling, that doesn’t mean they can afford to pay off their debt, especially as inflation continues to make it harder to afford basic necessities. Also, after graduation, the reality is different for marginalized households. She found that Asian Americans, Black Americans, Latinos, and Indigenous groups often have more than one generation in a home, supporting not only their own families but also their aging parents. “What if three generations live in one house and you are the sole breadwinner or they all rely on you?” Lee posits.
According to Perry and Romer, student debt relief reform should consider assets rather than income. “Policies should be evaluated according to their expected impact on people in different wealth classes,” Romer said. “Because black families have less wealth than non-black families, they are less able to contribute to the cost of higher education. This contributes to black students dropping out of college for cost reasons, and black households are more likely to have student loans without a corresponding increase in income,” Romer said.
For comparison, 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 position, with less intergenerational wealth due to histories of discrimination. This means black students with debt are less likely to exceed the net worth of their parents’ generation.
Expand access and funding for public higher education
While higher education still correlates with higher lifetime earnings, for black borrowers this equation isn’t that simple. The idea that studying is “worth it” is rather questionable if you still encounter discriminatory hurdles in your home, job and other areas after you graduate.
On average, private facilities are about 282% more expensive than public facilities. However, many community colleges are subsidized, making them low-cost alternatives, with an associate’s degree often serving as a springboard to a bachelor’s degree elsewhere. Perry argued in The Current that the subsidies already in place in the public sector should be expanded so that the cost of attending four-year public universities is free.
Ultimately, tuition reform should make public college degrees more financially accessible, which would eliminate the need for black students — and all students — to borrow in the first place. And it would mean that young people, particularly from the most disadvantaged groups, would no longer be penalized for wanting to advance their education.
