Issue 25: The Online Education Issue

Insights & Outlooks

Student Debt and the Racial Wealth Gap: Reform Should Narrow the Chasm 

Equity
Student Debt and the Racial Wealth Gap: Reform Should Narrow the Chasm 

We are eleven years overdue for reauthorization of the Higher Education Act. Many groups, from consumer advocates, to civil rights groups, to higher ed organizations, have called for a reauthorization that centers access, affordability and accountability. The question then becomes, how should this be done?

As awareness of the $1.6 trillion student debt crisis pulses steadily through media reports and campaign speeches, touching to some degree nearly every discussion of the struggles of today’s American families, we must look carefully at proposed reforms through the prism of the racial wealth gap. With Black families holding one-tenth of the wealth of White families, backers of any proposal must take that gap into consideration and be mindful that it has a narrowing effect, and not a tendency to spread the chasm ever wider. 

There are many promising and important measures on the table, such as indexing the Pell Grant to inflation, extending federal aid eligibility to DACA recipients and Pell Grants to individuals who are incarcerated, creating a path to debt-free community college through the America’s College Promise federal-state partnership, investing in HBCUs (Historically Black Colleges and Universities) and MSIs (Minority-Serving Institutions), and holding for-profit colleges and loan servicers accountable.

To ensure equal access, we must also address “backend affordability” — students must be able to afford the debt they carry. That requires taking serious steps to improve the repayment system. 

Changes in income-driven repayment plans can save thousands of dollars for borrowers during their repayment period, and can relieve them of their loan burdens faster. Most of us agree that repayment reform should consider low-income borrowers, defaulted borrowers and borrowers of color. But middle-income borrowers of color, who are trying to build wealth and financial security, must also be a part of the conversation. The rise of student debt coupled with centuries of discrimination and exclusion has meant that there are many people of color who have middle-class income but are unable to lead middle-class lifestyles. 

The median income of White borrowers with a bachelor’s degree is $53,780. For Black borrowers that figure is $41,700 and for Hispanic borrowers it is $45,690. At all income levels, Blacks significantly lag Whites in wealth accumulation. Younger families are likely to have even lower wealth than the average for Black families, which is $83,600 compared to $201,200 for White families.

These young Black families, despite relatively high incomes, have fewer resources and savings compared to White families to set aside for a down payment, and for medical emergencies, children’s education and retirement. They are less likely to receive financial assistance from parents, including inheritance, and in fact are also more likely to provide financial assistance to family and friends than affluent young Whites. The need to save for a down payment is particularly compelling for young Black families at these income levels, as their lower rates of homeownership are a major barrier to building wealth and contribute to high rates of downward mobility compared to White families. 

Because we know these substantial racial income and wealth gaps are a reality in this country, and we know that wealth and income, though sometimes related, are by no means equivalent, we must create policies that make access to the middle-class and wealth building open to everyone, explicitly recognizing and accounting for the extra challenges faced by borrowers of color.  We need a student loan repayment system that recognizes that a lack of wealth can keep even a relatively high income from translating into true financial security or actual wealth building. 

My organization, the Center for Responsible Lending (CRL), proposes an income-driven repayment plan that protects substantially more income for low- and moderate-income student loan borrowers compared to REPAYE, the newest and most generous IBR plan.

First, under the proposed CRL plan, borrowers making less than 250% of the poverty level in starting income, currently $23,000, make no payments at all during the life of the loan, assuming 4% annual income increases.  Second, payments are calculated at 8% of discretionary income under CRL’s proposal, compared to the 10% of discretionary income under the REPAYE plan. Finally, remaining debt is forgiven tax-free after 15 years under CRL’s proposal, while it remains payable under the REPAYE plan for 20 years.

Some reform proposals would expand REPAYE to all borrowers also but phase out the income exclusion protection for high-income borrowers. CRL opposes phasing out higher income borrowers because those with lower wealth levels will continue to struggle with their debt even at higher incomes. This “income cliff” will hurt Black borrowers more than White borrowers because of the racial wealth gap. When we base a system solely and entirely on income, we penalize those whose income must go further because they don’t have the wealth to back it up. While default is the most obvious and catastrophic outcome for struggling borrowers, many borrowers are in distress who may never default. 

We should also avoid plans that simply base repayment terms on the amount of debt a borrower carries. We know that borrowers of color, particularly Black borrowers, often take out more debt than other groups. While the average debt for all borrowers is $30,000, it is closer to $35,000 for black borrowers. Thus, any plan that elongates repayment terms based on debt levels will disproportionately penalize borrowers of color and make their repayment longer and more burdensome and complicated than it is for others.  

The racial wealth gap should be also be considered when we think about limiting Parent and Grad PLUS loans without making other changes and investments. Borrowers of color disproportionately rely on these loans, because they don’t have access to other types of funding for college or graduate school. And borrowers of color have to go to college and pursue advanced degrees if they want to obtain higher incomes. 

Additional considerations: Decreases in PLUS aid must be accompanied by increases in student borrowing limits at a minimum but preferably by drastic increases in grant aid and federal and state investments across institutions but especially at HBCUs and MSIs. Targeted debt cancellation would also limit the devastation of the debt crisis and have a particular impact on low-income borrowers and borrowers of color. All of these reforms can and should work together to create a system that is equitable, accessible and affordable.

Of course, the Higher Education Act reauthorization can’t fix everything; we need comprehensive reform of financial, healthcare and K-12 education in addition to fixing our student debt and higher education systems. But we still have a great opportunity to shape reform equitably through reauthorization of the Higher Education Act. That reform must be carried out with great attention to how this system is an essential part of the larger economy, and with the understanding that improper measures may entrench and even widen the racial wealth gap. 

Each piece within the parameters of the statute should be carefully considered and mitigated, so that borrowers of color are supported in building wealth. Attention to these concerns will help higher education fulfill its promise of being that great equalizer it was intended to be.