Student debt adds to racial disparities in wealth, study finds
While the pandemic has forced some to take a break from their studies to cut spending or save money, the growing debt burden on students was a problem long before COVID. And research suggests that there is a growing problem of racial inequality with student debt.
Fenaba Addo is Professor of Consumer Science at the University of Wisconsin-Madison and researched this student debt gap. The following is an edited transcript of her interview with Marketplace Morning Report host David Brancaccio.
David Brancaccio: What did you find in terms of student debt when you look at it in the context of the race of the people who hold 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 during repayment.
Black borrowers take on more debt
Brancaccio: So there are a few things to unpack here. So, first of all, black borrowers are taking on more debt. This is what your data shows. And then it takes longer to repay? Debt Last Longer?
Addo: It’s correct. So to attend post-secondary institutions, they borrow 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 off their debt faster. So the disparity increases over time.
Brancaccio: But in this general discussion of widening inequalities in America, there are some very worrying features here. I see that for white families, the richer the family, the less student debt it takes, but this is not necessarily the case for black families.
Addo: This is actually one of the striking findings from one of my first articles which explored the relationship between parental wealth and debt accumulation. Young white adults who went to college and took on debt, as their parents’ wealth increased, they got into less debt, right? We found no evidence to support this same relationship between black borrowers. Black borrowers who came from higher net worth households, we haven’t seen them take on less debt to go to college.
Intergenerational wealth inequality
Brancaccio: Has there been any hypothesis as to why this is happening?
Addo: Yeah, so we have several ideas. And one is related to the inequality of racial wealth in general. So in our data, at the upper ends of the wealth distribution, which was around $ 200,000 – it was actually around $ 191,000 to be in that top wealth quintile – only about 3% of black families actually had enough money. wealth to qualify to be that high. in the distribution of wealth. We also saw differences in overall wealth portfolios, so having less access to fungible types of wealth, so savings, you know, home equity that they could tap into to transfer additional funds to their children.
Brancaccio: And here we are, we are talking about parents and children, this is an intergenerational phenomenon that you are talking about.
Addo: It absolutely is. So, you know, in the accumulation play, we see the relationship between the wealth of parents and the accumulation of debt of their children. And then we look at the next piece, which is how to pay off that debt? We find that these disparities can contribute to persistent racial disparities among young adults, which we know will continue throughout an individual’s life, contributing to the continued persistence of racial wealth inequality within. our society.
Policy solutions: more grants, better loan repayment programs
Brancaccio: So what are some of the ways you would like policy makers to use results like this, to try to really narrow down these gaps that we’re seeing, these inequalities?
Addo: There are several pieces in this story. There is the accumulation part, then the repayment part. How can we ensure that black households and black families and their children, who want to attend post-secondary institutions, have access to the resources, the economic resources, which they need to pay for their university studies? And, how do we think about the types of supports they need to attend these colleges? So think more about need-based aid. Move away from aid based on loans, but rather grants, to help them pay for their university studies so as not to accumulate excessive debt if they do not have the resources to pay for their university studies, in particular for people who come from low income and low wealth households.
And then we think, in the reimbursement part, are there any particular potential frictions on the labor market? We want to reflect in particular on discrimination in the labor market. There is very strong evidence that suggests that black college graduates have higher unemployment rates than white students without a college degree. So all of this has to do with the ability to make a living and have an income that allows you to pay off those debts within a reasonable time. But then also, how do we think about what policies are currently in place, such as income-based reimbursement programs that can be improved upon so that those who need these particular types of policies can access and use them in a way that they can? help they pay off their debts within a reasonable time.
Brancaccio: Help me to understand. All you’re talking about is not just a proxy for income. You’ve found ways to control your data so you can really see where the effects of race are occurring.
Addo: It’s correct. So we control every kind of economic resource 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 in our society. during their post-secondary studies. And in particular, by examining the risk associated with the choice of [attend college] and really wanting to focus on the financial risk associated with it. There is a lot of evidence to support the lifelong return of graduating from college. But we also need to broaden what we think about when we think about the overall value and decisions involved in getting a college degree, and one of them is financial. And, as our data suggests, and as the work we’ve done in recent years really suggests, costs for black borrowers have increased exponentially. And he especially focuses on the amount of loan aid they are taking to make that dream come true.