Black Students' loan debt may be a debt trap.

Sep 29, 2022 By Susan Kelly

Higher education has long been viewed as a ticket to upward mobility in the United States. In a more extensive comparison, college graduates earn almost 75% more commonly than fellows who graduated from a high school.

Furthermore, higher education is getting increasingly expensive. Because Black households often have lower levels of wealth, a higher percentage of them must take out loans to get an education, and the amounts they borrow are higher than those of their white counterparts.

There is a 39% to 73% chance that students attending public or private colleges will graduate with debt, depending upon the country. The total balance of federal student loans is $37,667; if you include personal loans, the average balance might be $40,000.

Racial and ethnic minority group members typically bear the brunt of student debt because they sometimes have significantly fewer financial means to draw upon; this imbalance is the racial wealth gap.

What is racial wealth race?

The racial wealth gap is a discrepancy in total assets between white families and those of the racial minorities in the U.S.

For instance, according to the Federal Reserve (FR), White households had a median total asset of $188,200 in 2019. In contrast, Black households had a median net worth of $24,100, and Latinx/Hispanic families had a median net worth of $36,200. The Other race/ethnicity group recorded a median total asset of $74,500, involving families identifying as Native American, Asian, Alaska Native, Pacific Islander, Native Hawaiian, or with more than one racial identity.

One factor contributing to the wealth gap is the racial wage gap. According to the Federal Reserve survey, White families had an average earning of $69,000, while Black and Latinx/Hispanic families had a median income of $40,300 and $40,700, respectively.

Net worth shows significant differences in groups classified by education, ethnic or racial family, urbanity, and accommodation status. The wealth disparities are more meaningful but largely resemble those for income.

How does student debt widen the wealth gap?

Three education-related aspects primarily influence the racial wealth gap, including;

  • Graduation rates.
  • The type of school joined
  • The degree obtained

Let's take a closer look at each factor and its effect.

Graduation rates

According to a 2019 National Center for Education Statistics report, Black and Hispanic/Latinx students who enroll in college have much lower completion rates compared to their White peers. It revealed that 64% of White, 40% of Black, and 54% of Latinx/Hispanic students graduated from bachelor's degree-giving schools within six years. After six years, Asian American undergraduates had the most significant graduation rates (74%).

According to the Beaurea of Labor Statistics (BLS) 2020 survey, the unemployment rate for employees with bachelor's degrees was 5.55, in contrast to people whose highest level of education was a high school degree was 9%.

Putting it simply, students who drop out of college without receiving a degree frequently have nothing to show other than student loan debt that may be challenging or even not possible to return.

Type of schools attended

Students who graduated from for-profit colleges are more likely to fall behind on loan payments, regardless of their race.

According to enrollment data, black students are disproportionately more likely to attend for-profit schools.

Some degrees pay off more than others.

According to Georgetown University Centre on the Education and Workforce 2016 study, black students tend to be underrepresented in college majors, which leads to higher salaries, regardless of the school they attended.

A Pew Research Center report revealed that "most Black peers in STEM ranks consider major reasons for the devaluation of Hispanics and Blacks in science, technology, engineering, and math (STEM) subjects. These reasons include limited opportunities for quality education, inequality in recruitments and advancements, and a lack of inspiration to track these opportunities from an early age."

What are the long-term impacts of student loan debt?

Student loan debt may have long-lasting effects on many facets of a person's life. Although it applies to people of all races, Black students may be particularly affected because they are more likely to incur debt in the first place.

People with student loan debt review a lower degree of financial prosperity than similar students who don't have owing debt, according to a recent Federal Reserve study on the Economic well-being of U.S. Households.

Student debt may also hinder saving for retirement.

Why should student debt be canceled?

Student debt cancellation is one debated idea for reducing the income gap between races. For instance, according to the Roosevelt Institute study, "abandoning up to $50,000 in student loan debt per debtor would instantaneously enhance Black Americans' wealth by 40%."

No matter the household's race or income, some supporters will cancel all student loan debt, while others will only apply it to less-income families. Even if this might be beneficial in some other ways, one action is unlikely to solve the wealth disparity issue.

Impact of student loan forgiveness on the racial wealth gap

Advocates claim that student loan forgiveness can reduce the wealth gap between races, while they acknowledge that this is not the only way to address this complex issue. Instead, they claimed, it's a starting step in handling it.

Despite not explicitly providing student loan forgiveness, the massive American Rescue Plan Act of 2021 did include a clause making any forgiveness tax exemption by December 2025, ostensibly opening the door for subsequent congressional action.

President Joe Biden paused student loan repayments to lessen financial problems during the COVID-19 pandemic and reduced interest rates to 0%.

The White House offered debt relief for students with Department of Education Pell Grants of up to $20,000 and students without Pell Grants of up to $10,000. The income of borrowers cannot surpass $125,000 or, in the case of married couples, $250,000

Loan repayments will start again after December 31, 2022, unless the administration decides to prolong the suspension.

Bottom line

Members of the racial minority groups frequently need to borrow more money for schooling than their White classmates due to the racial wealth gap in the United States. Student loan debt might be a wise investment for those who go on to have lucrative jobs. The debt worsens the situation for students who drop out or graduate with minimal value degrees.

Related Articles