With the significant financial challenges that millions of Americans are facing today—in particular, households of color—there is increasing awareness of the struggles that many borrowers have experienced repaying their student loans, even before the COVID-19 pandemic.
Taking a holistic look at household financial security, and its relationship to race, can help researchers, policymakers, and advocates identify which current higher education-related policies contribute to disparate outcomes and what reforms are needed to better support borrowers of color.
For example, Black borrowers, when compared with White peers, often attend schools that historically have been underfunded. Research also indicates that Black borrowers have fewer resources with which to finance a college degree, they borrow more while in college, and they earn less afterward. They also are more likely to experience growth in what they owe after leaving school and are more likely to default on their loans, even when they have college degrees. In fact, college graduates who are Black are more likely to default on their loans than White college dropouts are.
These realities have prompted calls for various reforms, including student debt cancellation. But regardless of whether such major changes are enacted, it is critical to examine how existing policies—which will continue to affect student loan repayment even if some debt is forgiven—can lead to disparate outcomes.
For example, income-driven repayment (IDR) plans—which base monthly payments on income and family size and are more affordable for many—can help borrowers avoid delinquency and default. In certain cases, Black borrowers are more likely than White or Hispanic borrowers to use IDR plans. They are also more likely than their White counterparts to have lower incomes and higher student loan balances—meaning that their monthly payments as part of IDR plans are probably smaller in the short term and that more of their original principal balances could be forgiven in the longer term.
But in the interim, this also means that their balances continue to grow, a situation that can overwhelm and discourage borrowers. What’s more, because monthly payments in IDR plans are set at a certain percentage of “discretionary income”—borrowers’ disposable resources after they pay for essential expenses such as housing and groceries—student loan payments might represent a larger portion of household income for borrowers of color. Research shows that these families often pay more for goods and services, among other economic factors described below.
Income-driven plans are widely available, but Black borrowers continue to have higher rates of default than their peers, which can also contribute to a loan’s long-term balance growth. Importantly, the consequences of default—collection fees; wage garnishment; money being withheld from income tax refunds, Social Security, and other federal payments; and damage to credit scores, among others—are felt particularly acutely by low-income and minority communities.
That’s all been true since before the arrival of COVID-19. Although Hispanic and Black households have been hit particularly hard by the pandemic, a historic lack of “slack” in family budgets—caused by a number of factors, including discrimination in the labor market, in the housing market, and in our systems of education and justice—has long threatened financial security in these communities. And these factors, in turn, have an impact on which borrowers are well-positioned to repay and who faces challenges. For example:
These disparities put added stress on households of color when they experience financial shocks—such as car trouble, a broken appliance, or a lost job—which affect people of all ages and races and on every rung of the income ladder. And because family wealth is intergenerational, White households are more likely to receive mobility-enhancing and wealth-building transfers, such as money from relatives to pay for college tuition or a down payment on a house.
But balance sheets alone can’t paint a complete picture of whether households are financially secure; family, community, and societal trends matter as well. For example:
Although this list of factors is not exhaustive, it highlights the importance of a holistic consideration of families’ finances when assessing whether they are equipped meet their student debt obligations.
Student loan-related policy reform alone cannot close the racial wealth gap or ensure financial security for families of color. It cannot by itself remedy the causes of, or outcomes from, systemic inequality and discrimination. But if policymakers do not fully understand and address the broader context surrounding family financial health, they cannot design appropriate and effective higher education solutions; consider who should be involved in developing those interventions; or ensure that higher education provides opportunities to those who have not historically had a seat at the table.
Sarah Sattelmeyer is the project director and Jon Remedios is an associate with The Pew Charitable Trusts’ project on student borrower success. Sattelmeyer is a member of the Lumina Foundation’s Borrowers of Color Working Group.