Race and financial security play central role in student loan repayment
With the financial importance challenges faced by millions of Americans today – especially households of color – there is a growing awareness of the struggles that many borrowers had to repay their student loans, even before the COVID-19 pandemic.
A holistic look at household financial security and its relationship to race can help researchers, policymakers, and advocates identify current higher education-related policies that contribute to disparate outcomes and the reforms needed to better support higher education. colored borrowers.
For example, black borrowers, compared to their white peers, often attend schools that historically have been underfunded. Also research indicated that black borrowers have fewer resources to fund a college degree, borrow more while in school, and earn less afterwards. They are also 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 university degrees. In fact, black college graduates are more likely to default on their loans than white college dropouts.
These realities have prompted calls for various reforms, including student debt cancellation. But whether or not such major changes are enacted, it is critical to consider 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-contingent repayment (IDR) plans — which base monthly payments on income and family size and are more affordable for many — can help borrowers to avoid delinquency and non-payment. In some 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, which means their monthly payments under IDR plans are likely to be lower in the short term and a larger portion of their balances initial principals could be canceled in the longer term.
But in the meantime, it also means that their balances continue to grow, a situation that can overwhelm and discourage borrowers. Also, as monthly payments in IDR plans are fixed at a certain percentage of “discretionary income“- the resources available to borrowers after paying for essential expenses such as housing and groceries, student loan repayments could 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-oriented plans are widely available, but black borrowers continue to have higher default rates than their peers, which can also contribute to long-term loan balance growth. It is important to note that the consequences of a default—collection costs; wage garnishment; money withheld from income tax refunds, Social Security, and other federal payments; and damage to credit ratings, among others, is felt particularly acutely by low-income and minority communities.
This has all been true since before COVID-19 arrived. Although Hispanic and Black households were affected particularly hard by the pandemic, a historic lack of “slack” in family budgets – caused by a number of The factorsincluding discrimination in the labor marketin the housing marketand in our systems education and Justice— has long threatened the financial security of these communities. And these factors, in turn, impact which borrowers are well positioned to repay and which are facing challenges. For example:
- Wages have largely stagnated for years. At the same time, black workers at all levels have always been Paid less than their white peers. In addition to this pay gap, there is also a important racial wealth gap.
- Even before the pandemic, monthly and annual income volatility was common among low-income households and households of color (especially black households), making it difficult to budget and even plan for regular expenses such as loans. students.
- Low-income households spend more of their wages on basic needs like housing and childcare, leaving less money for unexpected or even regular expenses. For example, rent increases have outpaced income growth in recent decades, a period when less people of color that white households owned homes. And low-income families can cope higher costs for goods and services — such as higher interest rates for loans — than higher-income families.
These disparities put additional pressure on households of color when they experience financial shocks – such as car trouble, a broken appliance or a lost job – that affect people of all ages and races and at all levels. of the income scale. 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 school fees or a down payment on a house.
But balance sheets alone cannot paint a complete picture of household financial security; family, community and societal trends also matter. For example:
- A growing share of Americans live in a multigenerational household, a situation more common in communities of color. Although growing racial and ethnic diversity in America is a contributing factor, this increase is also leads by older adults moving in with children, meaning that an increasing number of people have care responsibilities. Even beyond the sharing of resources within a household, black families are significantly more likely than white households to provide financial assistance to friends and family.
- The place also matters: historically, a majority of black children have lived in very poor neighborhoods, which increases their risk of falling down the economic ladder as adults. This helps explain why, even among high-income households, fewer Black families live in high-resource K-12 school districts.
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 to deal with their student debt.
Student loan policy reform alone cannot close the racial wealth gap or provide financial security for families of color. It alone cannot address the causes or consequences of systemic inequality and discrimination. But if policymakers do not fully understand and address the larger context surrounding family financial health, they cannot design appropriate and effective higher education solutions; determine who should be involved in developing these interventions; or ensuring that higher education provides opportunities for those who have never had a seat at the table.
Sarah Sattelmeyer is the project director and Jon Remedios is associated with The Pew Charitable Trusts Student Borrower Success Project.