While education can narrow the gap, student debt can increase it.
The U.S. has always seen higher education as a way to achieve upward mobility. It is still a major factor, with college graduates earning 75% more than peers who have only graduated from high school.
This ticket is becoming increasingly costly. The likelihood that you will graduate with debt from a public college or private non-profit college today is between 39% and 73% depending on where you live. In 19 states, the average amount of debt is over $30,000 and in six states it’s more than $35,000. Students tend to be most affected by student debt, especially for members of racial or ethnic minorities groups. These people often have fewer financial resources than they need. This is known as the “racial wealth gap”.
What is the Racial Wealth Gap?
Economists have observed a significant gap in net worth over the years between White households and those from racial or ethnic minority groups in America. This is called the racial wealth disparity.
According to the Federal Reserve, White households had $188,200 in 2019, according to the most recent data. This compares with $24,100 for Black households, and $36,200 for Latinx/Hispanic families. The median net worth for households that identify as Asian, Native American or Alaska Native, Native Hawaiian, Pacific Islander or have more than one race was $74,500 in the Other race/ethnicity group.
Strong differences in net worth are evident across different groups based on education, race or ethnic background and housing status. These differentials usually mirror income but the wealth gaps are greater.
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The racial wage gap may also be a reason for the wealth gap. According to the Federal Reserve, White households have a median income $69,000 while Black households earn $40,300 and Latinx/Hispanic households make $40,700.
The College Borrowing Gap
It is not surprising that Black students are more likely to borrow money for higher education, despite having lower incomes and wealth. According to the American Council on Education, 86.% of Black bachelor’s degree recipients in 2015-2016 (the most recent data available), borrowed money to pay college costs, compared to 70.% for Whites. Black students borrowed $34,010 per year, compared to $30,119 for Whites.
Contrary to Black and White students, Latinx/Hispanic bachelor’s degree recipients were more likely to borrow (67%) and borrow less money ($25,524). There are many theories to explain this.
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A 2016 report by the Hispanic civil right organization National Council of La Raza, now UnidosUS, found that many Latinx/Hispanic parents and students are not familiar with the U.S. financial aid system, including the Free Application for Federal Student Aid. FAFSA is essential for obtaining grants, how to cancel sba loan application and other types of assistance. Undocumented or Deferred Action for Childhood Arrivals students (DACA) are not eligible for federal student loans. However, they may be eligible for state financial aid and private scholarships.
According to the Federal Reserve’s 2021 report, Black and Latinx/Hispanic college students are more likely to have trouble repaying their loans than White students. According to the report, 23% of Black borrowers fell behind on their brother loan payments among those under 40 years old, as compared to 20% for Hispanic borrowers, and 6% for White borrowers. The Fed concluded that these patterns could partly be explained by differences in the rates of degree completion, institutional type and wages for certain educational credentials.
How student debt can widen the wealth gap
The racial wealth gap is influenced by three main factors: graduation rates, school attended and degree earned. Let’s take a closer look at each of these factors and their impact.
Graduation rates are important
According to a report by the National Center for Education Statistics (NCES), Black and Latinx/Hispanic college students are less likely to complete their degrees than their White counterparts. The study found that 64% (of White) students who received a bachelor’s degree from a college or university were able to complete their degrees within six years. This compares with 54% for Latinx/Hispanic students, and 40% for Black students. The graduation rate for Asian American students was 74% after six year.
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Students who are able to check the box for “some college” but don’t have a degree, do not fare as well in the labour market than those who graduated high school.
According to U.S. Bureau of Labor Statistics 2020 data, workers aged 25-54 with some college earned $877 per week, compared to $781 for those with only a high-school diploma. This is a difference of approximately 9%. However, bachelor’s degree recipients earned $1,305 per week, which is about 65% more than workers with only a high school diploma.
Students who leave college without graduating often leave behind little, if anything, aside from student loan debts that can be difficult, if not impossible, to repay.
The type of school matters
Students who go to for-profit colleges are more likely than others to default on their loans, regardless of race. The Federal Reserve examined the data on adults aged 18-39 who borrowed money to finance their education. 24% were behind, compared to 9% for public colleges, and 7% for private colleges.
Students who go to for-profit schools are more likely to borrow more money. According to a 2020 American Association of University Women study on women attending four-year colleges for profit, they borrowed an average of $42,778 compared to $29,611 for public colleges and $32,086 from private colleges.
Numerous studies have also shown that employers think for-profit degrees are less valuable than those from public and private not-for profit schools. A 2018 National Bureau of Economic Research working paper reported that for-profit students not only earned less, but were also less likely be employed.
According to enrollment data, Black students are more likely than other students to enroll in for-profit schools. The NCES reported that as of fall 2019, the number of Black undergraduate students in four-year private for-profit institutions was 29 percent. This is more than twice the rate at four-year public nonprofit institutions (12%) and 11%) respectively. Latinx/Hispanic students accounted for 18% of four-year private for profit institutions. Public institutions had 13% and 20%, respectively.
For-profit schools, which mislead students by promising false promises and encouraging them to borrow federal loans, are particularly problematic. The U.S. Department of Education announced in March 2021 that it would make it easier to obtain federal “borrower defence to repayment” or “borrower protection” laws for federal students seeking to cancel their federal loan debt. According to the department, the new policy could result in 72,000 borrowers receiving $1 billion in loan cancellation.
