Is All Debt Bad Debt for Latinos and African Americans?

Recently, Jared Bernstein, the former chief economist to Vice President Joe Biden, and Michelle Singletary, a personal finance columnist for the Washington Post, had a little debate about debt in the Washington Post. Singletary’s view is that all debt is bad debt. Bernstein’s view is that debt can be great, good, or bad. As I read the exchange, it struck me that one’s view of debt could be shaped by race, specifically by being Latino or African American as opposed to being white.

Bernstein defined great debt as debt that “boosts your earning power such that you can pay it back and have money left over.” He defines good debt as debt that raises your living standards. He never got around to specifically defining bad debt, but we can conclude that it doesn’t boost one’s earning power or raise one’s living standards.

In contrast to Bernstein, Singletary is very pessimistic about debt. She wants people to see debt as something that puts them into “financial bondage.” She thinks that if people had a “healthy hatred of debt” there would be more cautious borrowing and fewer Americans overwhelmed by debt.

Bernstein and Singletary both have good points. Bernstein can point to the fact that many millions of Americans have had positive outcomes from going into debt to purchase homes, to obtain higher education that led them to higher-paying jobs, and to start successful businesses. By taking on debt, people have been able to move into high-opportunity neighborhoods that have improved their and their children’s lives.

On the other hand, Singletary can point to many Americans who have been burned doing these very same things. We have recently seen a financial crisis where millions of people ended up underwater on their mortgage or lost their homes to foreclosure. The share of Americans burdened by education loan debt continues to increase, the amount of their indebtedness is growing, and the share of people behind on their loan payments also appears to be rising. Starting a business is a high-risk venture. Most businesses fail, often leaving those who borrowed money worse off. Debt can lead to good outcomes, and debt can lead to bad outcomes.

The work on racial wealth inequities by Dēmos and the Institute for Assets and Social Policy (IASP) and others allows us to think a little more deeply about issues of debt specifically for Latinos and African Americans. Dēmos and IASP have found that the structure of racial inequality in America causes Latinos and African Americans to have lower returns on investments in homeownership and in education. These groups also appear to earn less from entrepreneurship.* This means that even when these investments turn out well, Latinos and African Americans earn less from them, on average, than whites.

But going into debt does not always end well. For Latinos and African Americans, the chances that these investments will turn out badly are higher than for whites. Latinos and African Americans are more likely to be exposed to predatory lending. They are more likely to experience discrimination in the labor market that leads to lower wages or unemployment. The history of racial discrimination and segregation means that they tend to have financially poorer social networks, and are less likely to have family and friends who can help them financially to get out of debt if investments don’t work out. These facts mean that Latinos and African Americans are at greater risk of encountering difficulties repaying loans.

For Latinos and African Americans, therefore, even when things work out well, the potential positive return from acquiring debt is in many cases lower than for whites, and the potential for being harmed by debt is higher than for whites. While everyone should be careful about acquiring debt, Latinos and African Americans should be doubly careful. What is “great debt” for whites is likely to be less great for these groups. “Good debt” is going to be less good. And the risk of stumbling into bad debt is much higher. All debt may not be bad debt, but until America fully addresses racial inequities in the economy, the chances of bad things happening from debt is greater for Latinos and African Americans.

* Firms with paid employees tend to have higher sales, which suggests that they have higher profits than firms without paid employees. Latinos and African Americans are underrepresented among the owners of firms with paid employees. Among firms with paid employees, Latino and African American firms pay lower average wages than white firms, which also suggests that Latino and African American firms are less profitable on average. See The Color of Entrepreneurship report.