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The Biden administration’s student loan relief plan is now on hold. Unfortunately, a federal appeals court blocked claims from six Republican states that the plan violates the law and would deprive their state credit companies of revenue.
This is just one of the many setbacks and backlash the student loan relief program has faced in recent weeks. In another lawsuit that was dismissed, a conservative Wisconsin legal group went after the White House for claiming the plan could reduce the racial wealth gap and improve racial equality, thereby giving the government an “improper racial motive.”
All of this is a political backlash due to partial relief for some borrowers. Imagine the panic if all student debt was eliminated or higher education became free.
But this column isn’t about how I want naysayers to whine. Instead, we should focus on fixing America’s broken higher education system, starting with focusing on the most financially vulnerable and penalized of all borrowers: black Americans.
The nation’s $1.7 trillion student debt crisis disproportionately burdens black borrowers because of racial wealth. On average, black households have about eight times less wealth than white households, and black students take on $25,000 more in college debt.
Because of their high financial need, blacks take out large amounts of loans in the hope that they will be repaid when they get a job after graduation. But the result is cyclical—higher loans mean they pay more interest over time, and because they earn less in dollars than their white counterparts, they have a harder time repaying loans than other groups (this is especially true for individuals), loans that may have higher interest rates than federal loans, and protection of minimum consumer rights). A 2019 study from Brandeis University found that 20 years after first enrolling in school, the average black borrower owes 95% of their previous student loan debt. Black borrowers are more likely to default on their loans than white borrowers, according to the Brookings Institution.
Moving forward, we must focus reform on racial inequality. That way, we have a better chance of helping not only this core group of troubled borrowers, but also all those who have been sold fraudulent promissory notes by school counselors, lenders, college administrators, and most importantly, our elected leaders. – about the reality of an expensive college degree.
A system where people don’t default on student loans would benefit everyone. “Higher education is now as basic as elementary or secondary education,” Andre Perry, a senior fellow at Brookings Metro, told The Current in August. “Society needs its people to be highly educated. That’s why we need a system that treats him equally.”
Why and how student loan reform should proceed
The administration’s loan forgiveness plan is a step in the right direction. It promises to eliminate up to $10,000 in federal student loan debt for low-income borrowers making less than $125,000 a year (or $250,000 for married couples) or up to $20,000 for low-income Pell Grant recipients.
But as my latest So Money guest Peter Dunn, a certified financial planner, said, “It’s a short-term solution. It doesn’t solve the underlying problems in the US higher education system.”
More importantly, policy and financial experts say the move won’t do enough to help narrow the racial wealth gap. In a podcast interview with Jean Lee, president of the Association of Minority Corporate Counsel, we discussed the impact of student debt on black and marginalized communities. “The federal government disproportionately benefits black students because they tend to take out more loans than other groups,” Lee said. “The government has the opportunity to make a big difference.”
Carl Romer, a former Brookings research fellow who co-authored a study with Perry that says student debt relief should address wealth, not wealth, told me in an email based on their findings: “The more student debt is eliminated, the more it has an ameliorating effect. will have a racial wealth gap.”
More debt forgiveness would be nice for the current generation of borrowers, but where do we go from here? How can we ensure that the next rising college student doesn’t take on more debt than they can afford to earn a degree that won’t necessarily lead to a well-paying job? How will we avoid the burden of lifelong debt the generation after tuition peaks?
If our goal is to create a level playing field, there are several ways policymakers can narrow the racial wealth gap and address what has become a major social and economic crisis in this country.
Lee’s proposed first step is for the administration to eliminate all interest for black borrowers. “Compound interest really adds up,” he said. One study by JPMorgan Chase found that 13% of black borrowers never pay off their loans because the added interest keeps them from paying the principal. Combine this with the rising overall cost of living and the fact that black students face fee discrimination, making upward mobility even more out of reach.
Higher interest rates have long-term negative effects on wealth inequality. I found one analysis that showed a borrower with a $28,000 federal loan balance and an interest rate of 5.8 percent would pay an extra $80 a month, meaning they could save about $9,000 over ten years if interest is taken out. Imagine if someone could put that money into a retirement fund, or if it could go toward a down payment on a home instead.
Focus on wealth, not income
To qualify for the current debt relief plan, borrowers must earn within a certain income threshold. But how much someone earns is an arbitrary figure—without context of financial obligations, generational wealth, or how much total debt they have.
Lee made an effective argument on my podcast that student loan relief should not be based on income. For example, if someone earns more than $125,000, that doesn’t mean they can pay off their debt, especially as inflation makes it harder to afford basic items. Moreover, the post-graduation reality is different for marginalized households. He noted that Asian Americans, Black Americans, Latinos and indigenous groups often have multiple generations in the same home, supporting not only their own families, but aging parents as well. “What if you live in the same house for three generations and you are the sole breadwinner or everyone relies on you?” Lee put.
According to Perry and Romer, student debt relief reform should look at wealth instead of income. “Policies should be evaluated in terms of their expected impact on people in different welfare groups,” Romer told me. “Because black families have less wealth than non-black families, they cannot help with the costs of higher education. This contributes to black students dropping out of college because of the costs, and black families are more likely to take out student loans. There is no corresponding increase in income,” he said. Romer.
For context, more than half of black households with student debt have zero or negative net worth. The main problem is that blacks are in a more precarious economic position overall, with less wealth between generations due to a history of discrimination. This means that black students with debt are less likely to outlive their parents’ generation.
Expand access to and funding for public colleges
While higher education is still associated with greater lifetime earnings, the equation is less straightforward for black borrowers. The idea that a degree is “smart” is questionable if you face discriminatory barriers in housing, employment, and other arenas after graduation.
Private institutions are on average about 282% more expensive than public institutions. But many community colleges are subsidized, making them a low-cost alternative, with an associate’s degree often serving as a stepping stone to earning a bachelor’s degree elsewhere. Perry told The Current that public-sector subsidies should be expanded to make four-year public universities tuition-free.
Ultimately, tuition reform should make public college degrees more financially affordable, eliminating the need for black students and all students to take out loans in the first place. This means that young people, especially those from disadvantaged backgrounds, will no longer be penalized for wanting to improve their education.