In 2021, the Wall Street Journal reported (log in required) on what many Black college graduates understand too well: a college degree is not necessarily making them wealthier. According to its analysis of Federal Reserve data, the median net worth of households with Black college graduates in their thirties declined over the past three decades to less than one-tenth the net worth of their white college graduates of the same age. The Wall Street Journal attributed the decline to increased student debt and sluggish income growth.
Americans naturally assume that a college degree increases a holder’s wealth profile. A person gets a college degree to secure a better job, greater income, and expanded opportunities. For these reasons, Black people, like people of every other race, are enrolling in college and attaining degrees more than ever before. But assumptions about the value of a college degree are betrayed by our conflation of income and wealth (the sum of a person assets, including income, and debts, including loans). Rising debt associated with a college degree is eroding the value it offers to individuals, families, and entire communities. While people with college degrees earn more money and have a longer life expectancy (log in required), debt directly offsets one’s earnings, job options, and sense of security overall.
In a 2021 Brookings Institution study, Carl Romer and I analyzed the Federal Reserve Board’s monthly report on consumer credit, in the third quarter of 2020. We found there were $1.7 trillion in student loans owed and securitized, making it a larger source of household indebtedness than credit card and vehicle debt. The number of households with student debt more than doubled from 1989 to 2010. Costs are being passed onto consumers in ways that don’t maximize society’s return on investment.
While most analysts and politicians across the political spectrum believe we have a student debt problem, there are deep divisions across those same lines on how to deal with it. A better understanding of two related issues can help policymakers develop a comprehensive policy strategy to address the student debt problem: the nature and causes of the racial wealth divide and our rising dependency on loans.
Student Debt and the Racial Wealth Divide
In the 2021 Brookings Institution study, we found that more than half of all student loan debt is held by households that have a zero or negative net worth. Compounding matters, the median net worth of a white household is eight times more than the median net worth of Black households. Consequently, solving the student debt crisis among Black families can lead to a higher education finance structure for the greater good. In addition, by focusing on the racial wealth divide, policymakers can acknowledge and address past and present racism that make the weight of the student debt crisis heavier for Black students.
According to the Pew Research Center, from 1993 to 2012, the share of students taking out loans to finance their degrees rose from roughly half (49 percent) to more than two-thirds (69 percent). During the same period, the average loan amount grew from $12,434 to $26,885, and surpassed $30,000 in 2020—a nearly three-fold increase in the last three decades. Households held just over $1 trillion in student debt in 2018. Society’s increased dependency on loans disproportionately impacts people from low-wealth families, which Black families are more likely to represent this category.
Wealth differentials translate into real wage differences among people with the same degree. According to a 2017 St. Louis Fed study, “White college-educated households are significantly more likely to receive financial transfers from their parents, whereas Black college-educated households are significantly more likely to provide financial support to their parents.” White families are more likely to receive additional income after graduation. Black collegians are asked to financially support their families. Moreover, children from families that have enough wealth to pay for college out of pocket, start a business, and purchase homes are much more likely to attend higher-performing schools, go to college, and hold political office—what we generally think of as the American dream.
Is Debt Cancellation a Solution?
Postsecondary finance reform must address ever-increasing tuition increases in ways that do not enflame wealth divides. Debt cancellation has been a go-to “solution” for the crisis. Notwithstanding the fact that cancellation doesn’t address the lack of price containment, there is a pervasive myth that rich families would be getting an unfair advantage if President Joe Biden cancelled student loans across multiple income groups.
Analyses that primarily focus on the income of graduates—not wealth and race—perpetuate this myth. As stated earlier, not only would cancellation help the majority of borrowers, but it would also provide relief for entire neighborhoods where low-wealth people are concentrated. Arguments of regressivity—that cancellation helps rich families more—focus on income, turning a blind eye to the racism that necessitates the need for loan relief among those who’ve been discriminated against. Slavery, Jim Crow racism, discrimination in housing, employment, and education contributed to the wealth divide we have today. Colorblind analyses effectively sidestep past and present-day discrimination. By focusing on income, claims of regressivity ignore root causes of the wealth gap and how cancellation can help redress injustices.
In the 2021 Brookings report, we plotted the net worth and wealth percentile of Black and non-Black households. By examining household net worth at every wealth percentile, we showed that cancelling debt shifts wealth up across the distribution. When student debt is cancelled, the racial wealth gap is decreased at every level, from the poorest Black households compared to the poorest non-Black households, to the wealthiest Black households compared to the wealthiest non-Black households. The more debt we cancel, the more we shrink the wealth gap.
Biden’s 2022 plan, which is being held up in the courts, will cancel up to $20,000 of student debt for Pell Grant recipients with loans held by the US Department of Education, and up to $10,000 for non-Pell Grant recipients. Debt cancellations are for people whose incomes are less than $125,000 (or $250,000 for married couples). So, many middle-class, low-wealth families will stand to benefit from this program. While currently there isn’t a practical way to means test wealth, the income requirement and increased benefit for Pell Grant recipients are a nod to low-wealth families of whom Black families are twice as likely to be.
Biden’s plan addresses the student debt crises, which Black borrowers can certainly appreciate. The plan also lowers the amount borrowers have to pay toward their income-based repayment plans from 10 percent to 5 percent of income, and it forgives loan balances after 10 years, down from 20. Making payments more affordable helps people whose wages do not keep pace with their cost of living and for those whose pay is throttled by wage discrimination.
Biden also addressed long-standing problems in the Public Service Loan Forgiveness (PSLF) program, which rejected about 98 percent of applications prior to his presidency. The US Department of Education offered a “limited PSLF waiver” that forgave debts for federal student loan borrowers who had served in a nonprofit; the military; or a federal, state, tribal, or local government for a period of at least 10 years.
Absent from Biden’s plan is a strategy that addresses an essential cause of the student debt crisis—ever-increasing student tuition. Having students pay for college seemingly contradicts how essential higher education is to today’s economy and America’s democratic aims. Society recognizes the need for quality public educational options at the primary and secondary levels. But higher education has become as basic in a knowledge economy. College is not a luxury. Just as we don’t expect families to take out a loan to go to elementary or high school, we need a financing structure that will eliminate the need to take on debt for college.
Nonetheless, most people who need loan cancellation are the same people who couldn’t have gone to college without loans. The wealthiest, highest income and highest-credit borrowers have either already paid off their student loans or have refinanced them. Black families are more likely to have student loans and are poorer at every wealth percentile than non-Black families. Repairing higher education financing is to face primary reasons why we have racial wealth differentials. Building a future higher education finance policy around its potential positive impacts for Black borrowers can help lead to policy that will maximize the value of college to all individuals and to society.
Any opinions expressed in the articles in this publication are those of the author and not the American Sociological Association.
