New Demos/IASP Report Shows How to Address Debt Crisis and Narrow Racial Wealth Gap

Despite its reputation as an antidote to inequality, the U.S. higher education system has reinforced and even exacerbated racial wealth inequality, by preventing many students of color from accessing college and loading black students with debt when they do attend. In Less Debt, More Equity: Lowering Student Debt while Closing the Black-White Wealth Gap, researchers from Demos and the Institute for Assets and Social Policy (IASP) at Brandeis University's Heller School for Social Policy and Management find that young black households are more likely to have student debt than their white peers, regardless of income, which contributes to widening wealth disparities between black and white households.

Racially-biased public policies have prohibited communities of color from accumulating wealth and diminished their ability to contribute as much to their children’s college degree as white parents. As a result, Black students are more likely to borrow, borrow at higher amounts, and to drop out without receiving a credential, often due to inability to pay. Instead of moving up the economic ladder and building wealth, far too many Black students find themselves crippled by insurmountable debt.

“The new normal of borrowing for college has not only wreaked havoc on the financial health of a generation of students, it has greatly deepened racial wealth inequality,” said Tamara Draut, Demos VP of Policy and Research. “While it once viewed as an engine of economic mobility, our broken college system is now pushing Black students even farther behind their peers.”

“While it once viewed as an engine of economic mobility, our broken college system is now pushing Black students even farther behind their peers.”

But as this inequality has been driven by public policy, there are clear policy choices that can provide debt relief to those who most need it and close wealth gaps in the process. Using the Racial Wealth Audit, a framework developed by the Institute on Assets and Social Policy (IASP), the researchers show that though universal debt relief is often posited as the best way to address the student debt crisis, this proposal would disproportionately benefit white households, ultimately expanding the divide between median black and white wealth by an additional 9 percent. However, a progressive student debt reduction policy would dramatically reduce the racial wealth gap among low-wealth households. Eliminating student debt among those making $50,000 or below reduces the black-white wealth disparity by nearly 37 percent among low-wealth households, and a policy that eliminates debt among those making $25,000 or less reduces the black-white wealth gap by over 50 percent.

"Policymakers have the opportunity to both reduce student debt levels and reduce the racial wealth gap," said Thomas Shapiro, Director of IASP. "However, to achieve both aims simultaneously, policy design must consider capacity to pay back loans and specifically reduce the financial burden of college for low and moderate income households."

Other key findings include:

Young black households (ages 25-40) are far more likely to have student debt. Over half (54 percent) of young black households have student debt, compared to 39 percent of all young white households.

The racial wealth gap is substantial even among young households. Among typical households age 25-40, whites have 10 times the wealth of blacks. The net worth of low-wealth black households (those at the 25th percentile) is actually negative, while low-wealth white households still have a modest financial cushion.

At the median, forgiving student debt only for low- and middle-income households reduces the racial wealth gap for black households. Eliminating student debt for households making $50,000 or below would reduce the racial wealth gap between black and white families by over $2,000, or nearly 7 percent. Eliminating student debt for households making $25,000 or below would reduce the racial wealth gap at the median between black and white families by over $1,000, or around 4 percent.

The researchers also provide a list of public policy interventions that would reduce the overall burden of student debt in ways that also narrow the racial wealth divide. These include guaranteeing debt-free public higher education for low-income and middle-class households; mandating institutional accountability and debt forgiveness for students attending low-quality institutions; offering incremental debt forgiveness for students in public, low-wage professions; and allowing student loans to be discharged in bankruptcy.

“Our current bankruptcy laws make the risk of taking on student debt too great.

Demos delves deeper into the last policy intervention in an additional new report, No Recourse: Putting an End to Bankruptcy’s Student Loan Exception. Currently, nearly one-in-seven student loans are in default within three years of a borrower leaving school and student loans were the only type of debt to see both overall balances and delinquencies rise in the aftermath of the recession. However, due to a series of amendments to the Bankruptcy Code beginning in the mid-1970s, student loans are treated differently than almost every other form of debt incurred by American households and are extraordinarily difficult to discharge. The report explains why struggling student loan debtors should be treated like all other borrowers and given the opportunity to rehabilitate themselves and reenter the productive economy.

“Our current bankruptcy laws make the risk of taking on student debt too great. As with other forms of debt, for those with good intentions who catch a bad break, there should be a way to rebuild,” said Mark Huelsman, Demos Senior Policy Analyst. “In an era where student loans are a requirement for most students to even access the higher education system, they should not be loaded with lifelong penalties.”